exploring the venture philanthropy ecosystem in indiabschool.nus.edu/portals/0/images/avpn ey vp...

Exploring the venture philanthropy

ecosystem in IndiaAn Asian Venture Philanthropy Network

and Ernst & Young joint publication

Contents

Contents

Preface 4

Executive summary 6

Introduction 8Background 8Objectives/Purpose 11Terminology 11Methodology 13Elements of the VP ecosystem 14Supply side 14Academic Institution 14Demand side 20Financial intermediation 21Professional service providers 22Academic institutions 22Supply side: Characteristics 22Market dynamics 23Investment preference and strategies 23Investment target 24Hjgnakagf�g^�fgf%ÕfYf[aYd�kmhhgjl�Yf\�]f_Y_]e]fl�d]n]d� *.Selection criteria and due diligence 27Return expectations and performance measurements against benchmarks 28Exit management 30Analysis of gaps in India’s VP ecosystem 30Capacity constraints faced by VP and allied organizations 31Low utilization of paid professional services for managing investee portfolios 31Concerns relating to risk management 32Geographic concentration of investees 34Inability to reach grass root organizations 35Daeal]\�YnYadYZadalq�g^�ÕfYf[aYd�afl]je]\aYlagf�k]jna[]k� +/Inadequate collaboration with academic institutions 37<]Zl�[gfkljYaflk�j]dYlaf_�lg�ogjcaf_�[YhalYd�ÕfYf[]�^gj�KHGk�� +0Issues related to Foreign Contribution (Regulation) Act, 2010 regulating ability of domestic VP organizations to raise funds abroad 38Relevance of proposed Securities and Exchange Board of India’s (Alternative Investment Fund) Regulations, 2011 38Absence of appropriate legislation for social businesses 40Hjgnakagfk�g^�<L;�Yf\�l`]aj�aehda[Ylagfk�gf�fgf%hjgÕl�KHGk� ,)Concluding comments 42

Acknowledgements 43

Bibliography 44

Preface

India faces several critical challenges in its social and development sectors in the 21st century. In the country’s battle to overcome these challenges, there is growing recognition of the importance of professional management in social purpose organizations (SPOs) today.

Over the past decade, the venture philanthropy (VP) movement has gained ka_faÕ[Yfl�_jgmf\�af�l`]�MK�Yf\�=mjgh]&�Al�`Yk�Y\Yhl]\�lggdk�Yf\�l][`faim]k�^jge�the venture capital (VC) and private equity (PE) segments to invest in and build sustainable and scalable SPOs. The focus of venture philanthropists is on providing multi-year support to ensure organizational capacity-building in SPOs. High levels of management competence, an emphasis on strategic planning to achieve ka_faÕ[Yfl�kg[aYd�[`Yf_]�gml[ge]k�Yf\�[gf[mjj]fl�e]Ykmj]e]fl�g^�l`]�aehY[l�g^�every dollar spent constitute the hallmarks of the VP movement.

In India, VP and allied organizations are making long-term strategic investments lg�Zmad\�^gj%hjgÕl�Yf\�fgf%hjgÕl�affgnYlan]�KHGk�l`Yl�[Yf�eYc]�Y�eYkk�kg[aYd�impact. VPs place emphasis on social returns, although some such organizations Ydkg�\]eYf\�eml]\�ÕfYf[aYd�j]lmjfk�af�Y\\alagf�lg�kg[aYd�j]lmjfk&�L`]�^gje]j�acknowledge that investment for social purposes and professional effectiveness Yj]�fgl�af�[gfÖa[l�oal`�gf]�Yfgl`]j$�Zml�[Yf�]pakl�Yf\�ogjc�af�kqf]j_q&�

L`ak�hYh]j�hj]k]flk�l`]�Õjkl�hjaeYjq�Ykk]kke]fl�g^�l`]�NH�][gkqkl]e�af�Af\aY&�As part of this effort, we have determined the extent of VP activity in India and how other players in the country’s social sector are complementing the growth of this movement. We have also focused our efforts on analyzing the extent of differentiation VP and allied organizations have introduced in the management of SPOs. Therefore, our research was designed to critically appraise provision g^�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�kmhhgjl�^jge�NH�Yf\�Ydda]\�gj_YfarYlagfk&�Af�\gaf_�so, we explicitly delineate the challenges the movement faces in the country and initiate a dialogue on strategies to overcome these challenges.

We hope this paper will help you understand the characteristics of VP models prevalent in India, and provide a foundation for Indian VP and allied organizations lg�^mjl`]j�\ak[mkk�Yf\�Õf\�ogjcYZd]�kgdmlagfk$�Yf\�]fkmj]�l`Yl�l`]�[mjj]fl�_Yhk�af�the country’s VP ecosystem are bridged.

Parul Soni | Dr. Rob John

Parul SoniPractice LeaderDevelopment Advisory Services Ernst & Young India

Dr. Rob JohnFounder Member Asian Venture Philanthropy Network (AVPN)

5 | Fraud Investigation and Dispute Services

About the authors

Parul Soni

Parul is the Practice Leader of the Development Advisory Services at Ernst & Young in Gurgaon, Af\aY&�@]�`Yk�gn]j�).�q]Yjk�g^�]ph]ja]f[]�af�providing strategic leadership to large development programs at the country and regional levels to national and international organizations. He has worked on a range of issues, including enhancement of women’s entrepreneurship, economic empowerment, corporate social responsibility and the effectiveness of donor-funded programs. His forte is developing innovative methodologies for the Bottom of the Pyramid (BOP) and social development solutions. Parul is a founding board member of Save the Children-Bal Raksha, the Indian entity of the Save the Children International network. He is the Co-chair of the Access to Finance working group in the La Pietra Coalition (based in Washington D.C.), an organization working to promote women’s economic empowerment worldwide. In addition, he is an Advisor to the Asian Venture Philanthropy Network in India.

Dr. Rob John

Dr Rob John is an independent consultant specializing in venture philanthropy and social entrepreneurship. He is a senior visiting fellow Yl�l`]�FMKÌ�:mkaf]kk�K[`ggd�af�Kaf_Yhgj]&�JgZ�helped found the Asian Venture Philanthropy Network (AVPN) and was the European Venture H`adYfl`jghq�9kkg[aYlagf�k�Õjkl�]p][mlan]�\aj][lgj&�Following a career spanning 15 years in international development, he directed an Oxford-based venture philanthropy fund, which traces its roots to the initiatiation of Oxfam, Action Aid and many other fgf%hjgÕl�gj_YfarYlagfk&�>jge�*((-�lg�*((1$�`]�was a visiting Fellow at the Skoll Centre for Social =flj]hj]f]mjk`ah�Yl�l`]�Mfan]jkalq�g^�Gp^gj\Ìk�KYa\�Business School, researching the development of venture philanthropy in Europe. His present focus is gf�]flj]hj]f]mjaYd�kg[aYd�ÕfYf[]�af�9kaY&

Stuti Dua

Stuti is a business researcher and consultant in the areas of generative thinking and performance management in innovative medium enterprises. 9f�E:9�^jge�DYf[Ykl]j�Mfan]jkalqÌk�EYfY_]e]fl�School, she has previously worked with Citibank and Yes Bank Limited. With a strong background in ÕfYf[aYd�eYfY_]e]fl$�Klmla�`Yk�Zjgm_`l�oal`�`]j�a unique blend of structured thinking and cross- functional project management skills to accomplish this research study.

6 | Exploring the venture philanthropy ecosystem in India

L`ak�j]hgjl�ak�l`]�Õjkl�hjaeYjq�Ykk]kke]fl�g^�l`]�VP ecosystem in India. Although VP and allied organizations have been in existence in the country kaf[]�l`]�dYl]�)11(k$�jgm_`dq�Yl�l`]�kYe]�lae]�l`]�trend was initiated overseas, there is inadequate documentation on the subject in the Indian context. Therefore, this report was commissioned with the following objectives:

�� To collate and share knowledge about elements that exist in India’s evolving VP domain To analyze and document existing gaps in the country’s current VP ecosystem

�� To initiate a dialogue for institutional strengthening of VP and allied models to help to augment the pace of socio-economic development in India

This research investigates, analyzes and documents the activities of the elements that are playing a critical role in the development of this fYk[]fl�Õ]d\&�O]�\]Õf]�l`]�]d]e]flk�g^�l`]�NH�ecosystem in India as follows:

a. Supply side: This constitutes VP and allied gj_YfarYlagfk�l`Yl�hjgna\]�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�kmhhgjl�lg�KHGk&

b. Demand side: These include SPOs whose Y[lanala]k�\aj][ldq�Z]f]Õl�l`]�[geemfalq�Yf\�create a social impact. These may either gh]jYl]�Yk�fgf%hjgÕl�]flala]k�gj�eYq�Z]�^gj%hjgÕl�kg[aYd�Zmkaf]kk]k�gj�]fl]jhjak]k&

Executive

summary

c. Financial intermediaries: These are relatively f]o�hdYq]jk�af�l`]�Õ]d\�Yf\�hjgna\]�ljYfkY[lagf�advisory services (akin to those provided Zq�afn]kle]fl�ZYfck!�lg�]fYZd]�Y�Ögo�g^�institutional capital to credible SPOs.

d. Professional service providers: These gj_YfarYlagfk�hjgna\]�fgf%ÕfYf[aYd�Y\nakgjq�services to the supply side as well as the demand side, and their services range from management [gfkmdlYf[q�lg�kh][aÕ[�^mf[lagfYd�eYll]jk�including performance measurement and evaluation.

e. Academic institutions: These mainly include institutes of higher learning that play an important role in training a pool of professionals, who can be expected to contribute to the further advancement of VP in particular and the social sector in general.

Our research focused on a concurrent exploration of all the elements operating in the VP domain, as compared to only a study of VP organizations in isolation. First, we conducted a secondary study on the activities of close to 300 national and international organizations that are associated with the social and development sectors in India. Thereafter, we selected 40 organizations out of these, which had the primary VP requirement of hjgna\af_�dgf_%l]je�Yk�o]dd�Yk�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�kmhhgjl&�Gml�g^�l`]k]�,(�gj_YfarYlagfk$�we surveyed 30 to understand their investment afl]j]klk$�k[gh]�g^�fgf%ÕfYf[aYd�]f_Y_]e]fl$�j]lmjf�


expectations, performance management and exit strategies. Next, we surveyed 20 SPOs that have Z]f]Õl]\�^jge�NH�^mf\af_&�Oàd]�gmj�kmjn]q�g^�l`]k]�20 SPOs may not seem extensive, as compared to the aggregate number of SPOs that are or have been supported by VPs and allied organizations, its only purpose was to obtain a representative view g^�l`]e&�L`]�kmjn]q�Ydkg�^g[mk]\�gf�l`]�Z]f]Õlk�g^�l`]�fgf%ÕfYf[aYd�kmhhgjl�g^^]j]\�Zq�NH�Yf\�allied organizations. It therefore comprised a mix of objective and subjective questions that sought kh][aÕ[�[gee]flk�gf�hjgnakagf�g^�fgf%ÕfYf[aYd�services. In addition, we conducted semi-structured afl]jna]ok�oal`�l`]�g^Õ[aYdk�g^�)-�j]hj]k]flYlan]�organizations operating across the VP ecosystem in the country.

The results of this exercise have helped us to understand the salient features of VP and allied organizations in India and have also provided us with

an insight into the gaps that currently exist in the country’s emerging VP ecosystem.

L`]k]�_Yhk$�kmeeYjar]\�af�l`]�Õ_mj]�YZgn]$�dYq�l`]�foundation for initiating a dialogue on institutional strengthening of VP and allied models in India. Strengthening VP within the country is likely to open up the scope for augmenting the pace of its socio-economic development. We conclude by offering some suggestions on how the gaps in the country’s VP ecosystem may be bridged. Our proposal builds a case for elements in the VP ecosystem pooling their resources to enable the following:

�� 9�kljYl]_a[�hYjlf]jkàh�f]]\k�lg�Z]�]klYZdak`]\�between VP and VC organizations in the country. Such partnerships are likely to not only provide l`]�Z]f]Õlk�g^�[g%afn]kle]fl$�Zml�Ydkg�`]dh�af�the development of a managed pool of high-quality volunteers comprising senior resource personnel from the VC and PE industries. This can

Inabililty to reach grassroot organizationsGeographic concentration of investees

Inabililty to reach grassroot organizationsGeographic concentration of investees

Capacity constraints of VP and allied organisationsLow utilisation of paid professional services for managing investee portfolios

Concerns relating to risk management

<]Zl�[gfkljYaflk�^gj�ogjcaf_�[YhalYd�ÕfYf[]�^gj�KHGkIssues related to Foreign Contribution Regulation Act, limiting the ability of

domestic VP foundations to raise funds abroad

Absence of appropriate legislation for social businessesRelevance of SEBI’s proposed regulations on social venture funds for VP funds

AehY[l�g^�hjghgk]\�<aj][l�LYp�;g\]�gf�eYfY_]e]fl�g^�fgf%hjgÕl�KHGk

be expected to help VP and allied organizations address their internal capacity constraints and also implement best practices in portfolio risk management.

�� The visibility and approachability of VP and allied organizations can be enhanced by the implementation of targeted training and educational programs to attract the attention and interest of grass-root organizations as well as qgmf_�Af\aYf�hjg^]kkagfYdk�af�l`]�Õ]d\&

�� >mjl`]jegj]$�l`]�d]_alaeY[q�g^�làk�fYk[]fl�Õ]d\�can be increased by identifying and partnering with the champions within the policy-making domain. This can help in the creation of laws that identify and incentivize the convergence of the hybrid model advocated by VP and allied organizations.


Introduction

In the past decade, philanthropy witnessed a differentiated approach that adopts leading practices from the VC and PE investment domains. Referred to as venture philanthropy, the advocates of this approach separate themselves from traditional philanthropists, kaf[]�l`]q�k]]c�lg�hjgna\]�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�kmhhgjl�gn]j�Yf�extended period of time stretching from two to over seven years. Their main objective is to help to ensure the sustainability and scalability of SPOs so that these can create the maximum impact with the limited resources at their disposal. This report provides an outline of the VP ecosystem in India.

BackgroundIn its country overview of India, the World Bank acknowledges that the country has emerged as a global player in the past decade, and is today the world’s fourth-largest economy in terms of its purchasing power. However, the bank’s preliminary ]klaeYl]�g^�hgn]jlq�af�l`]�[gmfljq�^gj�*((1Ç)(�stands at 32% . Furthermore, it questions the quality of service delivery of government programs when it states that “Most public programs suffer from varying degrees of ineffectiveness, poor targeting, and wastage of resources. In the current economic climate, India will have to dramatically improve the impact of every rupee spent.”1

L`]�Mfal]\�FYlagfk�<]n]dghe]fl�Hjg_jYee]� MF<H!�provides further analytical information on the co-existence of high economic growth with extreme poverty in the country, categorically stating that the high economic growth witnessed has not resulted in human development outcomes.2

Data from the World Bank on the effectiveness g^�Ya\�af\a[Yl]k�l`Yl�l`]�h]j�[YhalY�f]l�g^Õ[aYd�\]n]dghe]fl�YkkaklYf[]�j][]an]\�Zq�Af\aY�ak�MK�)1&3

1 The World Bank Group, (2011); India Country Overview; [online]; Mh\Yl]\�K]hl]eZ]j�*())!3�9nYadYZd]�Yl�`llh2''ooo&ogjd\ZYfc&gj_&af'O:KAL='=PL=JF9D';GMFLJA=K'KGML@9KA9=PL'AF<A9=PLF'($$[gfl]flE<C2*()1-/+0vhY_]HC2),))+/vhaHC2),))*/vl`]Kal]HC2*1--0,$((&`led�3�SDYkl�9[[]kk]\�*(�>]ZjmYjq�*()*U&

2 Empowered People: Resilient Nation, Situation Analysis and =e]j_af_�Akkm]k�^gj�Af\aY�*()+�Yf\�:]qgf\$�Mfal]\�FYlagfk�Development Programme, India, [online]; (November 2011); 9nYadYZd]�Yl�`llh2''ooo&mf\h&gj_&af'[gfl]fl'e\_'MF<HWAf\aYWSitan.pdf ; [Last Accessed 20 February 2012].

3 The World Bank Group, (2012); Data: Aid Effectiveness; [Online]; Available at http://data.worldbank.org/topic/aid-effectiveness [Last Accessed 20 February 2012].


Simultaneously, it shows a grim picture of the parameters used to measure the effectiveness of aid, e.g., the achievement of millennium development goals, which underlines the gaps in the effectiveness of aid provided in the country. Advocating the concept of capacity development as a means g^�]fkmjaf_�_j]Yl]j�]^^][lan]f]kk�g^�Ya\$�MF<H�categorically states that “while external assistance can have a catalytic effect on development gml[ge]k$�MF<H�Z]da]n]�l`Yl�g^Õ[aYd�\]n]dghe]fl�assistance (ODA) is just one element of national hmZda[�ÕfYf[]&Ê4

As “income has become more concentrated among the top earners in the country”,5 there has also been increasing pressure on mainstream commercial businesses to adopt initiatives that may fall outside the scope of their core competencies. While corporate India has responded to the call for greater participation by increasing its investments in Corporate Social Responsibility,. the abilities, and at times, even the intention of mainstream

,�MF<H3� *())!3�ÉMF<HÌk�J]khgfk]�lg�l`]�*())�Kmjn]q�gf�Monitoring the Paris Declaration: Implementing The Paris Declaration on Aid Effectiveness”; [Online]; Available at http://www.beta.undp.org/content/dam/undp/library/capacity-development/English/Implementing-the-Paris-Declaration-on-Aid-Effectiveness.pdf [Last Accessed 20 February 2012].

5 Klugman, Jeni; 2011; “Human Development Report 2011; Sustainability and Equity: A Better Future for All”; Published by HYd_jYn]�EY[eaddYf�^gj�Mfal]\�FYlagfk�<]n]dghe]fl�Hjg_jYee]3�9nYadYZd]�Yl�`llh2''mf\h&gj_&af''kal]k'\]^Ymdl'Õd]k'@<JW*())W=FWComplete.pdf ; [Last Accessed 20 February 2012].

.�K`]l`$�9jhYf�Yf\�Kaf_`Yd$�EY\`mj3� *())!3�ÉAf\aYf�HàdYfl`jghq�Report 2011”; Bain & Company, Inc. [online]; Available at http://ooo&ZYaf&[ge'ZYafo]Z'aeY_]k'Dg[YdG^Õ[]k':YafWHàdYfl`jghqWJ]hgjlW*())&h\^�SDYkl�9[[]kk]\�*(�>]ZjmYjq�*()*U&

commercial businesses to invest in serving the exclusive needs of the disadvantaged sections of society continues to be questionable. There is no doubt that the development of the market economy has brought about the commercialization g^�fme]jgmk�affgnYlagfk�l`Yl�`Yn]�ka_faÕ[Yfldq�improved the quality of life for many people in the country. However, when it comes to reaching out to those at the bottom of the pyramid, corporate k][lgj�gj_YfarYlagfk�kge]lae]k�Õf\�al�mfl]fYZd]�lg�alter their business models so that their products Yf\�k]jna[]k�e]]l�l`]�kh][aÕ[�j]imaj]e]flk�g^�dgo�income groups.7

8Streeten states society’s “disillusionment with government,”along with unwillingness to “hand over all the activities” to private businesses, which are primarily governed by economic motives, as possible reasons for a rise in the activities of non- hjgÕl�gj_YfarYlagfk� F?Gk!&�@go]n]j$�`]�ak�]imYddq�skeptical about the sustainability of NGOs and l`]aj�YZadalq�lg�Õdd�l`]�_Yh�l`]�?gn]jfe]fl�Yf\�l`]�private sector have left wide open. His paper offers statistical support for this argument when he states l`Yl�Yk�g^�)11/$�F?Gk�^Yad]\�lg�j]Y[`�gn]j�0(��of the 1.3 billion estimated to be living in extreme poverty, although they reached around 250 million hggj�h]ghd]�af�\]n]dghaf_�[gmflja]k� aZa\$�h�)1/!&�He concludes by stating that irrespective of the growth of NGO activities, their impact is not likely to be substantially increased, given that most of

/�Dgk]c]$�<gfad]]f�J3� )11/!3�ÉL`]�O`gd]�Khajal�g^�Eg\]jf�HàdYfl`jghq2�L`]�;gfkljm[lagf�g^�l`]�A\]Y�g^�;`Yjalq$�)1)*%)11*Ê3�Social Problems; Vol. 44; No. 4; Pgs. 425-444.

0�Klj]]l]f$�HYmd3� )11/!3�ÉFgf_gn]jfe]flYd�Gj_YfakYlagfk�Yf\�Development”; Annals of the American Academy of Political and Kg[aYd�K[a]f[]3�Ngd&�--,3�H_k&�)1+%*)(&

them suffer due to the vagueness in their objectives, management issues and lack of scalability, which limits their reach to only a few, with the “poorest not being among them.” 1

The current development paradigm in India is dominated by the following two trends:

�� There is an increasing interest in application of private wealth to eradicate poverty and related social evils. In 2010, private charity in India was ]klaeYl]\�Yl�Z]lo]]f�MK�-�Zaddagf�lg�MK�.�Zaddagf$�Y�l`j]]%^gd\�af[j]Yk]�^jge�MK�*�Zaddagf�]klaeYl]\�af�*((.&10

�� An increasing number of individuals or institutions hjgna\af_�ÕfYf[aYd�j]kgmj[]k�lg�KHGk�Yj]�Ykcaf_�an equally increasing number of questions on the impact of each dollar spent on improving the quality of life in the country. This has resulted in advocacy of the need to apply the professional principles of investment and management to philanthropy, with the objective of building an inclusive society in India.

Globally, concerns relating to the issue of effective utilization of resources by SPOs have led to an orientation toward strategic philanthropy, which has metamorphosed into VP. While strategic hàdYfl`jghq�Y\ng[Yl]\�Yhhda[Ylagf�g^�k[a]flaÕ[�methods to measure the impact of every dollar

1�Klj]]l]f$�HYmd3� )11/!3�ÉFgf_gn]jfe]flYd�Gj_YfakYlagfk�Yf\�Development”; Annals of the American Academy of Political and Kg[aYd�K[a]f[]3�Ngd&�--,3�H_k&�)1+%*)(&

10 Sheth, Arpan and Singhal, Madhur; (2011); “Indian Philanthropy Report 2011”; Bain & Company, Inc. [online]; Available at http://ooo&ZYaf&[ge'ZYafo]Z'aeY_]k'Dg[YdG^Õ[]k':YafWHàdYfl`jghqWJ]hgjlW*())&h\^�SDYkl�9[[]kk]\�*(�>]ZjmYjq�*()*U&


spent, VP goes a step further to ensure the availability of adequate resources for professionally eYfY_]\�KHGk&�Fgl�gfdq�ak�l`]j]�ka_faÕ[Yfl�stress on measurement of performance, the VP approach emphasizes the importance of SPOs’ performance management. Venture philanthropists have therefore adapted the rules of VC or PE investments to select and provide resources for long-term management of credible and innovative social purpose “investee” organizations to help them deliver their strategic social goals.

The VC model can be described as an orderly process involving sequential steps related to the origination of deals (active consideration of investment prospects), deal screening (in-depth evaluation of a few chosen investment prospects), deal evaluation (an assessment of the expected risk and return from an investment) and deal structuring (consummation of a deal by entering an agreement detailing the price of the deal in terms of equity and other covenants related to management structure and control of the business.11 Once a deal is signed, the role of the venture capitalist expands from being an investor to that of a collaborator with an active interest in the performance of the newly formed organization. Venture capitalists nurture innovative but high risk businesses by providing capital as well as strategic advice and networking opportunities. The start-ups that perform receive further capital, whereas those with ideas that fail to take off are cut off from further investments.

))�LqZb]]$�Lqrggf�L&�Yf\�:jmfg$�9dZ]jl�N&3� )10,!3�É9�Eg\]d�g^�Venture Capitalist Investment Activity”; Management Science; Vol. +(3�Fg&�13�H_k&�)(-)%)(..&

L`]�kYe]�hjaf[ahd]k$�o`]f�Yhhda]\�lg�l`]�Õ]d\�g^�philanthropic funding to reap social returns, can provide a better chance of success for leaders with innovative ideas on social progress. In the West, the rise of VP is attributed to Letts, Ryan and ?jgkkeYfÌk�)11/�Yjla[d]12 — an article that does not mention the term “venture philanthropy,” but which lists the need for philanthropic grant-making foundations to study VC techniques and principles to achieve enhanced social returns, as compared to traditional grant-making by philanthropic associations (Moody, 2008)13 and Van-Slyke and F]oeYf� *((.!&14 Stating that the challenges ^Y[]\�Zq�Y�N;�Õje�Yf\�Y�_jYfl%eYcaf_�^gmf\Ylagf�are similar, since both seek accountability and reliability in the performance of young organizations af�aehd]e]flaf_�a\]Yk$�D]llk�]l&Yd� )11/!�mj_]�Y�more comprehensive and engaged relationship between grant-making foundations and recipient organizations on the lines of those existing between N;�Õjek�Yf\�afn]kl]]�[gehYfa]k&

Frumkin (2003)15 provides a glimpse into the political and economic context leading to the emergence

)*�D]llk$�;`jaklaf]3�JqYf$�OaddaYe3�Yf\�?jgkkeYf$�9dd]f3� )11/!3�“Virtuous Capital: What Foundations Can Learn from Venture ;YhalYdaklkÊ3�@YjnYj\�:mkaf]kk�J]na]o3�Ngd&�/-3�Fg&�*3�H_k&�+.%,,&

13 Moody, Michael; (2008); “Building a Culture: The Construction and Evolution of Venture Philanthropy as a New Organisational >a]d\Ê3�Fgf%HjgÕl�Yf\�NgdmflYjq�K][lgj�ImYjl]jdq3�Ngd&�+/3�Fg&�*3�Pgs. 324-352.

),�NYf�Kdqc]$�<Yna\�Yf\�F]oeYf$�@Yjn]q3� *((.!3�ÉN]flmj]�Philanthropy and Social Entrepreneurship in Community J]\]n]dghe]flÊ3�FgfhjgÕl�EYfY_]e]fl�Yf\�D]Y\]jkàh3�Ngd&�).3�Fg&�+3�H_k&�+,-%+.0&

15 Frumkin, Peter; (2003); “Inside Venture Philanthropy”; Society; Vol. 40; No. 4; Pgs. 7-15.

g^�l`]�[gf[]hl�g^�NH�af�l`]�MK&�9[[gj\af_�lg�àe$�the rise of the VC movement in the country in l`])11(k�j]kmdl]\�af�l`]�]e]j_]f[]�g^�Y�f]o�[dYkk�of wealthy individuals, who were successful in building large companies from scratch by using the hjaf[ahd]k�g^�\m]�\ada_]f[]�Yf\�dgf_%l]je�ÕfYf[aYd�commitment, as well as by availing of strategic advice on managing young businesses. This led to a jak]�af�afn]kle]fl$�Õjkl�af�l`]�hgdala[Yd�Õ]d\$�oal`�l`]�)11)�MK�hj]ka\]flaYd�[YehYa_f�g^�l`]�<]eg[jYlk�focusing on the use of the term “social investments” in domestic health and education programs. Gradually, investments found their way into the Õ]d\�g^�hàdYfl`jgha[�_jYfl%eYcaf_$�oal`�l`]�Yae�g^�seeking a solution to issues relating to social impact and measurement.

Af�=mjgh]$�NH�]e]j_]\�af�l`]�Õjkl�\][Y\]�g^�l`]�*)kl�century and now spans grant-making and investment Y[lanalq�af�KHGk�Ç�^jge�[`Yjala]k�Yf\�F?Gk�lg�kg[aYd�businesses.). It spread rapidly in Europe with the formation of the European Venture Philanthropy Association in 2004, which has a member base of 140+ organizations today, which actively advocate and promote VP across 20 European countries.

India has not been untouched by the emerging VP phenomenon, and according to our research, there Yj]�+-Ç,(�gj_YfarYlagfk�gh]jYlaf_�af�l`]�[gmfljq�that have gained their learning from VC and PE industries to suit the varied needs of Indian SPOs.

).�:YdZg$�Dm[aYfg3�@]`]fZ]j_]j$�DakY3�Egjl]dd$�<a]j\j]�Yf\�Oostlander, Pieter; (2010); “Establishing a Venture Philanthropy Organisation in Europe - A Practical Guide; (2nd Edition); Published by European Venture Philanthropy Association.


Objectives/PurposeThe study has three main sections that are devoted to discussion on the following:

�� Elements of the VP ecosystem in India

�� Characteristics of Indian VP and allied organizations

�� Gaps in the country’s VP ecosystem

L`ak�klm\q�ak�l`]�Õjkl�[gf\m[l]\�Zq�9NHFÌk�Knowledge Centre and complements its mission of promoting the cause of VP across Asia. The focus of the research is on the VP and allied organizations that have invested in SPOs in India. However, the afl]flagf�ak�fgl�lg�\]Õf]�Y�ja_a\�h]jae]l]j�j]dYlaf_�lg�the principles of VP in practice. Instead, we present a concurrent exploration of the activities of VP players that are crucial to the development of an ecosystem, which is favorable for the spread of VP in the country.

This research report has been written with the following objectives:

�� To collate and share knowledge on the activities of the large number of players in the evolving VP domain in India

�� To analyze and document the gaps in India’s VP ecosystem

�� To initiate a dialogue for institutional strengthening of VP and allied models and facilitate the process of augmentation of the pace of socio-economic development in the country

TerminologyFrumkin17 has provided the translation of VP terminology given below:

VP term Translation

Investment Grant

Investor Donor

Social return Impact

Performance measurement

Evaluation

Benchmarking Standard-setting

Due diligence Grant review process

Consultative engagement

Technical assistance

Investment portfolio Grant list

Taking this VP terminology as the base, we have expanded it, keeping in view the expansion the domain has witnessed in the last decade.

17 Frumkin, Peter; (2003); “Inside Venture Philanthropy”; Society; Vol. 40; No. 4; Pgs. 7-15.


Table 1: Terminology

Term Description

VP and allied organizations L`]k]�gj_YfarYlagfk�[gfklalml]�l`]�kmhhdq�ka\]�g^�l`]�NH�][gkqkl]e�Yf\�af[dm\]�gj_YfarYlagfk�l`Yl�hjgna\]�ÕfYf[aYd�Yf\�fgf%�ÕfYf[aYd�kmhhgjl�to SPOs. These may individually describe themselves as engaged grant-makers, venture philanthropists, impact investors or social venture capitalists.

Social Purpose Organizations L`]k]�]flala]k�[gfklalml]�l`]�\]eYf\�ka\]�g^�l`]�NH�][gkqkl]e�Yf\�Yj]�]f_Y_]\�af�Y[lanala]k�l`Yl�\aj][ldq�Z]f]Õl�kg[a]lq�Yf\�[j]Yl]�Y�hgkalan]�kg[aYd�aehY[l&�L`]k]�[Yf�Z]�kg[aYd�Zmkaf]kk]k�gj�]fl]jhjak]k�l`Yl�eYq�_]f]jYl]�ÕfYf[aYd�hjgÕlk� Ydgf_�oal`�kg[aYd�j]lmjfk!�gj�fgf%hjgÕl�entities that are commonly referred to as NGOs.

Investment This includes grants, equity or debt or a hybrid of these.

Investee This is an SPO that has received assistance from a VP organization.

Investee portfolio Làk�j]^]jk�lg�Y�_jgmh�g^�KHGk�l`Yl�`Yn]�j][]an]\�ÕfYf[aYd�gj�fgf%ÕfYf[aYd�kmhhgjl�^jge�Y�hYjla[mdYj�NH�gj_YfarYlagf&�

Fgf%ÕfYf[aYd�kmhhgjl�gj�YkkaklYf[] Làk�af[dm\]k�kljYl]_a[�gj�^mf[lagfYd�kmhhgjl�g^^]j]\�oal`�l`]�ÕfYf[aYd�YkkaklYf[]�g^�Y�n]flmj]�hàdYfl`jghakl�lg�alk�Éafn]kl]]Ê�KHGk&

Due diligence This is a comprehensive review process undertaken by a venture philanthropist before it invests in SPOs. The process may focus on the legal, _gn]jfYf[]$�gh]jYlagfYd$�kg[aYd�Yf\�ÕfYf[aYd�Ykh][lk$�Ydgf_�oal`�gl`]j�^Y[lgjk�l`Yl�eYq�Z]�\]]e]\�f][]kkYjq�Zq�Y�n]flmj]�hàdYfl`jghakl�Yl�the time it takes a decision on making an investment in an SPO.

Investors These include individual or institutional investors, who contribute to the funds of venture philanthropists.

Stage III:

Analysis and reporting

Stage II:

Data collection

Stage I:

Inception and preparation

Secondary review of lliteratureResearch on databaseSampling (for surveys and interviews)

Internal consultations and preparation of study tools

Focused group surveys (for VP and allied organizations and SPOs)

Semi-structured interviews (with players operating across the ecosystem)

Generalization and interpretation of survey results and the qualitative information obtained from interviews

Selection of short case notes

Internal consultations and reporting the outcomes

Methodology As a descriptive research, this study undertakes a concurrent study of the views of the large fmeZ]j�g^�hdYq]jk�l`Yl�hdYq�Y�ka_faÕ[Yfl�jgd]�af�the country’s evolving VP ecosystem. Throughout the implementation of the research process, we have focused on a participatory approach to ensure that we receive the most comprehensive and unbiased responses from various respondent groups. Our research was directed at communities of organizations that comprise the VP ecosystem and was undertaken at the following three levels:

a. A study of individual organizations constituting the supply side of the VP ecosystem: At làk�d]n]d$�o]�Õjkl�[gf\m[l]\�[gehj]`]fkan]�secondary research on close to 200 national and international organizations that provide funds to SPOs in India, and selected 40 funding organizations that displayed the following characteristics:


�� Hjgna\]k�[YhY[alq%Zmad\af_�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�kmhhgjl� Yf\�fgl�hjgb][l%ZYk]\�ÕfYf[aYd�kmhhgjl!�lg�KHGk�

�� @Yk�dgf_%l]je�]f_Y_]e]fl�`gjargf� mkmYddq�lasting for >two years)

These organizations constitute the core of our study of the VP ecosystem.

b. Categorization of supply-side organizations: Next, we focused on segmentation of selected supply-side players to understand their degree of orientation toward application of VC principles to the social sector. We surveyed 30 out of our 40 focus group organizations and conducted detailed interviews with 7 of these (which were selected on the basis of their responses to our survey). The survey provided us with an insight into the activities of supply-side organizations on l`]�^gddgoaf_�Õn]�ZjgY\�lgha[k2�� Gja_afYlagf�Yf\�eYfY_]e]fl�g^�NH�Yf\�Ydda]\�

organizations

�� Afn]kle]fl�afl]j]klk$�kljYl]_a]k�Yf\�k]d][lagf�criteria

�� K[gh]�g^�fgf%ÕfYf[aYd�]f_Y_]e]fl�Yf\�delivery channels

�� J]lmjf�]ph][lYlagfk�Yf\�h]j^gjeYf[]%measurement initiatives

�� =pal�kljYl]_a]k

c. A study of communities of organizations with functional characteristics that inherently inter-link them to VP organizations recognized \mjaf_�l`]�Õjkl�log�klY_]k2 At this stage, we conducted semi-structured interviews with two to three representative organizations from each of the following groups: �� KHGk�[gfklalmlaf_�l`]�\]eYf\�ka\]�g^�l`]�NH�

ecosystem: Apart from conducting interviews, we also surveyed 20 SPOs that had already j][]an]\�ÕfYf[aYd�kmhhgjl�^jge�NH�Yf\�Ydda]\�organizations. Our survey of the SPOs included a healthy mix of objective and descriptive questions to solicit qualitative information.

�� >afYf[aYd�afl]je]\aYlagf�gj_YfarYlagfk�l`Yl�are beginning to provide an important link in connecting VP and allied organizations with SPOs

�� Hjg^]kkagfYd�k]jna[]k�Yf\�kljYl]_a[�Y\nakgjq�organizations that help supply-side and demand-side organizations develop knowledge-led solutions that are targeted at maximizing the latter’s social impact

�� Academic (higher learning) institutions that Yj]�`]dhaf_�lg�e]j_]�afl]j%\ak[ahdafYjq�Õ]d\k�g^�study to serve the increasing needs of skilled professionals in the social development sector

Thereafter, we analyzed the data we had collected to map the arguments provided by the various participants and arrive at the gaps in India’s VP ][gkqkl]e&�L`]�ÕfYd�YfYdqkak�hj]k]fl]\�af�l`]�j]hgjl�provides a synthesis of the arguments put forward by the various respondent groups across the categories mentioned above. In addition, we added illustrative case notes to provide our readers with a clear concept of the country’s VP ecosystem.


Elements

of the VP

ecosystemThis section presents a discussion on the various elements of the VP ecosystem in India.

Supply side Supply-side players identify themselves in numerous ways — as grant-makers, VP funds, impact investors and social venture funds (SVFs). Some that only invest in social businesses were visibly concerned with the use of the word “philanthropy” because they do not want to be perceived as charitable organizations. For them, funding SPOs is an investment that can help to solve socio-economic issues in the country. However, those that describe themselves as VP players understand that while they may invest in SPOs that may generate commercial returns (along with social returns), they use the term to bring out the dual role they are playing. While they are meticulous in their due diligence procedures and adopt all the standard tools to manage their investee portfolios (like mainstream VC and PE players), they are extremely sensitive to the cause their investee SPOs seek to address. Therefore, they do not mind the use of the term philanthropy, because, in their pursuit of helping their investees achieve well-measured social returns, they are also ready to reap l`]�ÕfYf[aYd�j]oYj\k$�o`a[`�eYq�o]dd�Z]�dgo]j�l`Yf�their mainstream investments. Says Molly Alexander

of the Acumen Fund, “Venture philanthropy as a phrase can be misleading. In essence, venture philanthropy is about deployment of capital to meet l`]�kh][aÕ[�j]kgmj[]�j]imaj]e]flk�g^�kg[aYd�hmjhgk]�organisations. It has application across grass root NGOs all the way through to social businesses. Within the broad spectrum of venture philanthropy, it’s less about what terminology is being used; it’s about how you partner with your investees. Do you truly understand the needs of an organisation? Where can you help it beyond just that capital? When you structure a deal with an SPO, are you doing it in a way that is most suitable for it and its mission? And how are you partnering with these investees on measuring the impact that reveals their success and growth?”

Balbo et al (2010) highlight the emergence of two directions within European VP, one with a focus

on investment in social businesses that can generate ÕfYf[aYd�j]lmjfk�gn]j�Yf\�YZgn]�l`]�afn]kl]\�Yegmfl$�and the second, which focuses on provision of grants to charities that may not demonstrate direct generation g^�hjgÕlk&�:gjjgoaf_�^jge�\aj][lagfk�af�=mjgh]Yf�NH�literature, we have segmented supply-side organizations in India’s VP ecosystem into three broad categories and collectively describe them as VP and allied organizations.

Grantmaker

Social Venture Capital

Impact Investor

Venture Philanthropy Fund 33.3%

54.2%

41.7%

20.8%

Figure 3: Supply-side players in the VP ecosystem:

multiple identities

Kgmj[]2�=jfkl��Qgmf_Ç9NHF�Af\aY�NH�][gkqkl]e�eYhhaf_�kmjn]q$�January 2012

Academ

ic InstitutionSupp

ort a

ctiv

ities

Soci

al s

ecto

r adv

isor

y Supply side

VP funds/Impact investors/Engaged grant-makers/Social venture capital/Ventrure capital and PE funds

Social enterprises/Social businesses/Cost recovery/Cost subsidy models

NGOs

Demand side (SPOs)

Field-building initiatives �� Seminars�� Conferences�� Networks�� Social Venture

Competitions�� Online Platforms

Figure 2: Venture philanthropy ecosystem in India


1. Engaged grant-makers: These organizations Yj]�mkmYddq�j]_akl]j]\�Yk�fgf%hjgÕl�]flala]k�af�India and use grants as their preferred mode lg�ÕfYf[]�l`]aj�afn]kl]]�KHGk&�L`]k]�Yj]�Ycaf�to traditional foundations as far as their use of _jYflk�Yk�l`]aj�hj]^]jj]\�ÕfYf[aYd�afkljme]flk�is concerned. However, in their selection and management of the portfolios of SPOs, they are as diligent as mainstream venture capitalists. Their preferred mode of investment is long-term j]kmdl%gja]fl]\�^mf\af_�g^�affgnYlan]�fgf%hjgÕl�KHGk$�Yk�[gehYj]\�lg�hjgÕl%gja]fl]\�gf]k&�Consequently, they only look for social returns from their investments in SPOs.

2. VP funds: These organizations are not averse lg�mkaf_�Yfq�ÕfYf[aYd�afkljme]fl�È�Z]�al�]imalq$�debt or grant. Their preference for a funding instrument is dictated by the solution provided by SPOs, and within India, is limited by the country’s legal and policy frameworks. Similarly, l`]aj�]ph][lYlagf�g^�ÕfYf[aYd�j]lmjfk�ak�_gn]jf]\�by the causes targeted by their investee SPOs.

3. Impact investors/Social venture capitalists: These are organizations that prefer to invest in market-oriented solutions to create a social aehY[l&�L`]aj�hj]^]jj]\�ÕfYf[aYd�afkljme]fl�ak�equity and they are most inclined to invest in [gee]j[aYd�KHGk�l`Yl�[Yf�_]f]jYl]�ÕfYf[aYd�returns over and above the invested amount.

However, by no means are they relaxed in their pursuit of social returns and provide hands-on support to their investees, to ensure that they do not deviate from their targeted social impact. They are averse to the use of the term “philanthropy” and to any suggestion that there is a charitable element woven into their investments. They take it as a challenge to invest in businesses that have devised innovative models with interwoven cost leadership and product differentiation strategies, which enables them to serve disadvantaged sections of society.

0

Equity

Engaged Grantmakers

Financial Returns Expectation

Venture Philanthropy FundsImpa

ct In

vest

ors/

Soci

al V

entu

re

Grants Equity (Refundable Convertible

debt and non refundable)

The commonality binding these three segments is that while they may use different investment philosophies to articulate their approach to investing af�KHGk$�Ydd�Yj]�lg�kge]�\]_j]]�afÖm]f[]\�Zq�the practices of venture capitalists in selecting and managing their portfolios of social purpose investees.

Figure 4: Supply side: VP and allied organizations


Case notesSupply side

Investment philosophy Describing itself as an active practitioner of VP, the Deshpande Foundation provides access to human resource capabilities, networks and reinforcement efforts in addition to funding support for innovative NGOs. The foundation only expects social returns from its investments, since it seeks to build a large network of leaders, o`g�[Yf�\]n]dgh�Yf\�aehd]e]fl�j]d]nYfl�Yf\�k[YdYZd]�a\]Yk�l`Yl�oadd�Z]f]Õl�dg[Yd�[geemfala]k&�

Preferred investment instrument(s): grants (non-refundable)

Investment targets The Deshpande Foundation has adopted innovation with a relevance approach and directs all its investments lgoYj\�KHGk�gh]jYlaf_�af�Õn]�j]_agfk�af�CYjfYlYcY&�L`]�^gmf\Ylagf�[gfka\]jk�l`Yl�l`]�jgd]�g^�F?Gk�ak�l`Yl�g^�]fYZd]jk$�Yf\�l`]j]^gj]$�ljYfka]fl�af�fYlmj]&�Al�kmhhgjlk�l`gk]�fgf%hjgÕl�kg[aYd�afalaYlan]k�l`Yl�[Yf�Z]�]ph][l]\�lg�become self-sustainable over a period of time and can be replicated elsewhere.

Investment criteria The foundation evaluates prospective investees on the basis of exhaustive qualitative criteria, taking into account the following:�� L`]aj�affgnYlan]�gj_YfarYlagfYd�eg\]dk�Yf\�kgmf\�kljYl]_a]k�� Their prospects for organic growth and scalability �� Their social leadership capacity

Targeted investment per investees — need-based

Afn]kle]fl�`gjargf�È�l`j]]�lg�Õn]�q]Yjk

Level of engagementAfn]kl]]k�g^�l`]�<]k`hYf\]�>gmf\Ylagf�`Yn]�Z]f]Õl]\�^jge�l`]�]ph]ja]flaYd�]f_Y_]e]fl�hjgna\]\�Zq�alk�employees in domains ranging across: �� Strategy consulting �� Development of IT infrastructure�� Human capital management and leadership development�� Promotion and marketing �� Networking opportunities

Deshpande FoundationEstablished in the US in 1996, the Deshpande Foundation commenced its India operations in 2005. Since then, the organization has funded more than )((�F?Gk�Yf\�^gj%hjgÕl�gj_YfarYlagfk&�L`]�^gmf\Ylagf�has also instituted the Deshpande Centre for Social Entrepreneurship in partnership with the BVB College of Engineering and Technology and has developed a network of 40 colleges in Karnataka to promote social affgnYlagf�l`jgm_`�alk�ÖY_k`ah�D=9<�hjg_jYe&�

“The Deshpande Foundation has invested in a strategic, interwoven portfolio of social investments in response to the needs and aspirations of local communities. We at the Deshpande Foundation consider entrepreneurial opportunities as the framework necessary for a sustainable and prosperous society. Our venture philanthropy YhhjgY[`�lgoYj\k�KHGk�[geZaf]k�l`]�]p][mlagf�]p[]dd]f[]�g^�^gj%hjgÕl�afklalmlagfk�Yf\�[gehYkkagf�^gj�fgf%hjgÕl�Yf\�kg[aYd�k][lgj�gj_YfakYlagfk&�O]�Z]da]n]�l`Yl�o`]f�Yf�affgnYlan]�YhhjgY[`$�d]Y\]jk`ah�YZadala]k�Yf\�infrastructure support are combined, change happens.”

Naveen Jha, Deshpande Foundation

01



Investment philosophy The Acumen Fund raises philanthropic capital from social investors to invest in innovative SPOs. It manages these investments for returns on its invested capital, while seeking to maximize the social impact (or social j]lmjfk!&�L`]�ÕfYf[aYd�j]lmjfk�_]f]jYl]\�Zq�l`]�>mf\�Yj]�[`Yff]d]\�lg�kmhhgjl�egj]�KHGk�jYl`]j�l`Yf�Z]af_�distributed among the social investors that have contributed to it.

Preferred investment instrument(s): — equity, debt, convertible debt or a hybrid of these

Investment targets The Acumen Fund invests in SPOs that provide innovative products and services to disadvantaged people in areas including agriculture, education, access to energy, health, housing, sanitation and water.

Investment criteria These include:�� Scalability of ideas and social innovation�� Financial feasibility and sustainability �� Skills, experience and commitment to the social impact of investees’ management

LYj_]l]\�afn]kle]fl�h]j�afn]kl]]k�È�MK�)�eaddagf3�jYf_]�MK�*-(cÇMK�*&-�eaddagf�

Investment horizon — 7 to 10 years (may extend depending on the need for it)

Level of engagementEgj]�l`Yf�0(��g^�l`]�9[me]f�>mf\Ìk�afn]kl]]k�`Yn]�Z]f]Õl]\�^jge�l`]�`Yf\k%gf�]f_Y_]e]fl�hjgna\]\�Zq�alk�employees in domains ranging across: �� Strategy and change management �� Executive coaching and mentoring; recruitment of senior management �� Help with product and process innovation�� >mf[lagfYd�aehjgn]e]fl�Y[jgkk�\geYafk�km[`�Yk�AL$�ÕfYf[]�Yf\�_gn]jfYf[]�� Networking opportunities

Acumen FundA pioneer in developing the “patient capital” afn]kle]fl�eg\]d�lg�kmhhgjl�KHGk$�fgf%hjgÕl�Yf\�^gj�hjgÕl�]fl]jhjak]k$�l`]�9[me]f�>mf\�ak�Y�_dgZYd�organization with operations in India, Pakistan, =Ykl�Yf\�O]kl�9^ja[Y&�Alk�`]Y\�g^Õ[]�ak�af�F]o�York. Incorporated in 2001 with seed capital from the Rockefeller Foundation and the Cisco Systems Foundation, it has invested US$28,000,000 in 24 investees in India till date.

ÉAf\aY�oYk�gmj�Õjkl�afn]kle]fl�hgjl^gdag&�O]�`Yn]�Z]]f�`]j]�^gj�)(�q]Yjk�fgo�oal`�Y�hj]k]f[]�gf�l`]�_jgmf\�^gj�.&�EYfq�g^�l`]k]�[gehYfa]k$�Z]af_�gmj�]Yjda]kl�afn]kle]flk$�Yj]�fgo�kge]�g^�gmj�egkl�kgh`akla[Yl]\�afn]kle]flk�Yf\�o]�Yj]�Õf\af_�l`Yl�kge]�g^�l`]�kg[aYd�affgnYlagfk�l`Yl�`Yn]�]e]j_]\�af�Af\aY�[Yf�Z]�j]hda[Yl]\�in other countries as well. For e.g., we invested in a drip irrigation company for small holder famers in India, and then worked with them to set up a joint venture, selling these drip irrigation kits in Pakistan. Currently, through the support of an Acumen Fund Global Fellow, we are supporting their expansion into East Africa.”

Molly Alexander, Acumen Fund.

02


Investment philosophy Describing itself as a team of social venture capitalists, First Light India Accelerator invests in commercial Zmkaf]kk]k�l`Yl�`Yn]�l`]�hgl]flaYd�lg�eYc]�kg[aYd�aehY[l�k[YdYZd]&�@go]n]j$�al�[gfka\]jk�alk]d^�Y�ÉÕfYf[aYd�ÕjklÊ�investor operating in the impact investment space. Therefore, it does not invest in organizations that do not have af%Zmadl�j]n]fm]�eg\]dk�lg�_]f]jYl]�ÕfYf[aYd�j]lmjfk�Ydgf_�oal`�kg[aYd�aehY[l&

Preferred investment instrument(s): — strong preference for equity investments; may consider convertible debt in the case of companies based in India

Investment targets K]]\�klY_]� hadgl�gj�hjgg^%g^%[gf[]hl�klY_]!�^gj%hjgÕl�Zmkaf]kk]k�l`Yl�`Yn]�fgl�j][]an]\�hj]nagmk�afklalmlagfYd�^mf\af_�ogjl`�egj]�l`Yf�MK�)(($(((�&>mjl`]jegj]$�>ajkl�Da_`l�Af\aY�9[[]d]jYlgj�gfdq�afn]klk�af�gj_YfarYlagfk�o`gk]�]f\�Z]f]Õ[aYja]k�Yj]�^jge�l`]�dgo�income segment. It does not invest in social businesses that have cross-subsidy models (revenue models that hjgna\]�kmZka\ar]\�hjg\m[lk�gj�k]jna[]k�lg�\akY\nYflY_]\�k][lagfk�g^�kg[a]lq�gf�l`]�ZYkak�g^�hjgÕlk�_]f]jYl]\�from selling to economically sound consumers).

Investment criteria These include:�� EYjc]l�ghhgjlmfalq�Yf\�kar]�� Integration of social innovation and sound business model�� Skills and experience of investees’ management

LYj_]l]\�afn]kle]fl�h]j�afn]kl]]k�È�MK�)(($(((�lg�MK�+-($(((�

Afn]kle]fl�`gjargf�È�È�Õn]�lg�k]n]f�q]Yjk�

Level of engagementEgj]�l`Yf�0(��g^�>ajkl�Da_`l�Af\aY�9[[]d]jYlgjÌk�afn]kl]]k�`Yn]�Z]f]Õl]\�^jge�l`]�`Yf\k%gf�]f_Y_]e]fl�provided by its employees in domains ranging across: �� Strategy consulting �� Assistance and opportunities for product innovation�� J]Õfaf_�g^�afn]kl]]kÌ�ÕfYf[aYd$�gh]jYlagfYd�Yf\�_gn]jfYf[]�hjg[]kk]k�� Legal advice �� Human resource management

First Light Ventures India AcceleratorFirst Light Ventures is an Atlanta-based seed fund that ak�Y^ÕdaYl]\�lg�?jYq�?`gkl�N]flmj]k&�Al�dYmf[`]\�>ajkl�Light India Accelerator in collaboration with the Shell Foundation in 2009. Since its launch, First Light India Accelerator has made nine social sector investments (amounting to a total of US$ 2.5 million) in the country.

“At First Light, our focus is on supporting entrepreneurs as they prepare for larger, more commercial rounds of funding. We believe that by hewing to commercial standards, social enterprises can have the widest possible impact.”

Mark Hand, First Light India Accelerator


03


Demand side L`]�eYaf�\]eYf\�^gj�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�support offered by VP and allied organizations is from SPOs, which can be generally categorized into fgf%hjgÕl�]flala]k�Yf\�^gj%hjgÕl�kg[aYd�Zmkaf]kk]k&�India’s social sector is crowded with NGOs, which `Yn]�Y�ka_faÕ[Yfl�hj]k]f[]� Yf�]klaeYl]\�+&+�eaddagf!�in the country.18 However, venture philanthropists k`go�Y�[d]Yj�hj]^]j]f[]�]al`]j�^gj�^gj%hjgÕl�kg[aYd�Zmkaf]kk]k�gj�^gj�l`gk]�fgf%hjgÕl�]flala]k�l`Yl�have credible delivery models, which can help them maximize their impact over a period of time.

A short survey of 20 SPOs that have already received support from VPs indicated a positive hj]^]j]f[]�^gj�fgf%ÕfYf[aYd�kmhhgjl�Yf\�l`Yl�l`]�top ranking ones generally seek legal advice. SPOs are clearly looking for funding organizations that can adopt a partnership approach to help them address

)0�K`mcdY$�9j[`YfY3� *()(!3�É>ajkl�g^Õ[aYd�]klaeYl]2�9f�F?G�^gj�every 400people in India”; The Indian Express [online]; Available at `llh2''ooo&af\aYf]phj]kk&[ge'f]ok'Õjkl%g^Õ[aYd%]klaeYl]%Yf%f_g%^gj%]n]jq%,((%h]ghd]%af%af\aY'.,++(*'�3�SdYkl�Y[[]kk]\�*(�>]ZjmYjq�2012).

their governance and capacity-building challenges. L`gk]�l`Yl�`Yn]�Z]]f�^mf\]\�Zq�NHk�^]]d�[gfÕ\]fl�about adopting a professional management approach while experimenting with ideas to generate tangible solutions for the varied socio-economic challenges faced in the country.

Table 2: SPO perception relating to value addition from

fgf%ÔfYf[aYd�k]jna[]k

SPOs’ perception of value addition

^jge�fgf%ÔfYf[aYd�k]jna[]k�Response

Percentage

We feel that these services add ka_faÕ[Yfl�nYdm]�lg�l`]�ÕfYf[aYd�support we receive.

.*&-�

We feel that these services provide helpful additional support to the funding we receive.

37.5%

O]�^]]d�l`Yl�l`]�ÕfYf[aYd�kmhhgjl�provided is of more value than the fgf%ÕfYf[aYd�k]jna[]k�o]�j][]an]&

0.0%

Kgmj[]2�=jfkl��Qgmf_Ç9NHF�Af\aY�NH�][gkqkl]e�eYhhaf_�survey, January 2012

LYZd]�+2�Fgf%ÔfYf[aYd�k]jna[]k2�KHG�hj]^]j]f[]�jYfcaf_

Fgf%ÔfYf[aYd�k]jna[]k2�KHG�hj]^]j]f[]�jYfcaf_

Rating Average

Legal advice 3.50

Promoting and marketing investees’ products and services

3.00

Change management 3.00

Executive coaching/mentoring *&.(

Human resource management (e.g., leadership development, headhunting, etc.)

2.33

Development of IT infrastructure 2.20

Networking opportunities 2.08

@]dh�af�j]Õfaf_�afn]kl]]kÌ�ÕfYf[aYd$�operational and governance processes

2.00

Fund-raising strategy 1.83

Assistance and opportunities for product innovation

)&./

Strategy consulting )&./

Other services 1.00

Special advice, e.g., mergers, franchising, etc.

0.00

Estate management (e.g., help in Zmad\af_$�j]flaf_�gj�Zmqaf_�g^Õ[]�space)

0.00



Financial intermediation Within the VP ecosystem, an important and noticeable trend is the emergence of investment banking services for SPOs. Most VP organizations employ professional investment or portfolio managers to ensure adequate deal structuring at the time they invest in SPOs. However, demand-side players usually do not have adequate in-house resources to help them negotiate the terms of deals. As a result, there are only a few social investment banks in the country that provide technical assistance to SPOs in raising the required capital today.

Most transaction advisory services provided by l`]k]�ÕfYf[aYd�afl]je]\aYja]k�`Yn]�Z]]f�^gj�ea[jg%ÕfYf[]�afklalmlagfk� E>Ak!�Yf\�kg[aYd�Zmkaf]kk]k&�These intermediaries are now exploring ways to [`Yff]dar]�l`]�Ögo�g^�egf]q�lg�F?Gk�oal`�k[YdYZd]�and sustainable social impact models.

L`]�]e]j_]f[]�g^�km[`�ÕfYf[aYd�afl]je]\aYja]k�is creditable, since provision of professional ÕfYf[aYd�k]jna[]k�oadd�`]dh�KHGk�^g[mk�gf�l`]aj�[gj]�missions, rather than on devoting their resources to the constant task of fund-raising. In the case of venture philanthropists, provision of “buy-side” advisory by these dedicated social investment banking organizations can help the former conduct ljYfkY[lagf�kgmj[af_�Yl�jYlagfYd�nYdmYlagfk�]^Õ[a]fldq�and comprehensively.


Case notesFinancial intermediation: facilitating deal structuring for SPOs

Intellecap’s role: Sell-side advisory including transaction sourcing and documentation, valuation, structuring and negotiation K]dd�ka\]2�Y�^gj%hjgÕl�kg[aYd�Zmkaf]kk�Buy side: an international private foundationLjYfkY[lagf�kljm[lmj]2�Akkm]�g^�;gehmdkgjadq�;gfn]jlaZd]�Hj]^]j]f[]�K`Yj]k� ;;HK!�oal`�Y�hj]%\]l]jeaf]\�Öggj�Yf\�[Yh�hja[]�Yf\�l`]�Y[lmYd�hja[]�Z]lo]]f�l`]�Öggj�Yf\�l`]�[Yh�lg�Z]�\]l]jeaf]\�Y^l]j�)-�egfl`k$�ZYk]\�gf�Y�pre-determined formula

Transaction advisor“Intellecap” — Intellectual Capital Advisory Services Private Limited

Transaction description: Series A

“The value of an advisor in a transaction goes well beyond simply making an introduction to an investor or negotiating the valuation terms in a transaction. The role of the intermediary becomes critical when there is Y�dg_bYe�Z]lo]]f�l`]�afn]klgj�Yf\�l`]�kg[aYd�]fl]jhjak]$�hYjla[mdYjdq�gf�fgf%ÕfYf[aYd�akkm]k&��L`ak�ak�o`]j]�l`]�experience of doing multiple such transactions in the past, along with the ability to come up with innovative solutions, comes in extremely handy to navigate tricky solutions and arrive at a win-win solution, which protects the long-term interests of the business as well as its promoters.”

Anurag Aggarwal, Intellecap

Challenges

Challenges

Suggested solution by Intellecap

Suggested solution by Intellecap

After due diligence, the buy side communicated that they were not earlier aware that part of the equity held by the promoters of the SPO has not been issued for cash but in kind. According to the buy side, this increases risk in the Zmkaf]kk$�kaf[]�l`]�hjgegl]j�`Yk�d]kk�Ékcaf�af�l`]�_Ye]$Ê�Yf\�l`]j]^gj]$�al�\]eYf\]\�l`Yl�l`]�Öggj�hja[]�k`gmd\�Z]�reduced.

The negotiated term sheet offered certain rights to the buy side, but its legal counsel raised concerns regarding these rights, stating that those being offered by the promoter of the SPO were only theoretical in nature and might not be legally enforceable. The buy side wanted to walk off from the deal after getting it reviewed by its legal counsel.

Intellecap initiated a dialogue with all the parties, and provided multiple alternatives and much-needed comfort to protect the interests of the investor as well as the promoter(s) of the SPO.

L`]�\]eYf\�^jge�l`]�Zmq�ka\]�oYk�l`Yl�l`]�Öggj�hja[]�k`gmd\�Z]�j]\m[]\�Yf\�l`]�hjgegl]j�g^�l`]�[gehYfq�k`gmd\�Z]�_an]f�Y�q]YjÌk�lae]�lg�af^mk]�^mjl`]j�[Yk`�af�l`]�Zmkaf]kk�Yk�]imalq&�=n]flmYddq$�l`]�Öggj�hja[]�ogmd\�af[j]Yk]$�depending on the equity invested by the promoter. This could have been a deal-breaker, since this proposal for l`]�Öggj�hja[]�lg�Z]�[`Yf_]\�[Ye]�Yl�Y�[jm[aYd�hgafl�o`]f�l`]�hjgegl]jk�o]j]�]ph][laf_�l`]�ljYfkY[lagf�lg�Z]�closed within a few days. Intellecap worked with the promoters and the investor, and restructured the proposal in a manner that bridged the expectation gap between the two parties.

A

B


Professional service providers These are organizations that have the potential to become the backbone of the VP ecosystem and hjgna\]�]ph]jl�k]jna[]k�af�Õ]d\k�jYf_af_�^jge�d]_Yd�matters to market sizing to supply-side and demand-side players. An increasing focus on accountability Yf\�]^Õ[a]fl�\]hdgqe]fl�g^�h`adYfl`jgha[�Yf\�Ya\�capital has led to companies offering strategic and expert advisory services that are tuned to the needs of the social sector. The various kinds of services offered by these organizations can be categorized as follows:

Table 4: Professional advisory services available for

India’s social sector in India

Strategic

advisory

Research &

Development

Measurement

and evaluation

Organizational diagnostics (across the HR, IT, operational and legal domains)

Market assessment and intelligence

Governance and legal appraisal

Capacity development

Product evaluation

Financial audit

Growth and transformation planning and implementation

Cause-related publications

Measurement of social impact

While many small and niche players have been catering to the increasing demand from the social k][lgj�\mjaf_�l`]�dYkl�Õn]�q]Yjk$�eYafklj]Ye�eYfY_]e]fl�[gfkmdlaf_�Yf\�Y\nakgjq�Õjek�`Yn]�Ydkg�

entered the arena. This has increased competition af�l`]�Õ]d\&�Lg\Yq$�kljYl]_a[�[mklge]jk�g^�l`]k]�professional services companies include bilateral and multilateral aid agencies, international grant-making foundations, state and central governments and the CSR arms of corporate organizations. Only 37% of the VP organizations we surveyed rely gf�hYa\�[gfkmdlYflk�lg�e]]l�l`]�kh][aÕ[�f]]\k�g^�their investee SPOs. However, as VP and allied organizations see an increase in their number of hgjl^gdag�afn]kl]]k$�hjg^]kkagfYd�Y\nakgjq�Õjek� oal`�wide experience in the country’s grass root social sector) can be expected to become their preferred eg\]�lg�hjgna\]�fgf%ÕfYf[aYd�k]jna[]k�af�Y�[gkl%effective manner.

Academic institutions Academic institutions operate on the periphery of the VP ecosystem. At the undergraduate level, barring a few elite engineering institutes, there are not many tier 1 institutions in the country that are proactively directing their students’ interest toward developments and innovations in the social sector. Among the postgraduate and professional afklalmlagfk�gh]jYlaf_�af�Af\aY$�o]�Õf\�l`]�^gddgoaf_�noteworthy trends that can have an impact in shaping the country’s VP ecosystem:

a. Most institutions of higher learning in the country have begun to sensitize their students on social issues, and are increasingly focusing on encouraging their students to volunteer and associate with SPOs during their academic years.

b. Teaching concepts such as CSR and the double bottom line have become an integral part of B-school curricula across the country.

c. Some institutions have also initiated specialized courses in social entrepreneurship and NGO management.

The academic fraternity members are of the opinion that they are helping students become aware of the need for professional management in the social and public sector. However, they concede that the number of students taking up jobs in the social sector aee]\aYl]dq�Y^l]j�l`]q�_jY\mYl]�ak�afka_faÕ[Yfl&�

Supply side:

Characteristics VP organizations in India emerged at the same time as their counterparts in the West, i.e., in the late )11(k&�L`]�;`Yjala]k�9a\�>gmf\Ylagf� ;9>!�Yf\�l`]�Rashtriya Gramin Vikas Nidhi (RGVN) are the oldest practicing VP organizations in the country, and both `Yn]�Z]]f�]pl]f\af_�ÕfYf[aYd� _jYfl%ZYk]\!�Yf\�fgf%ÕfYf[aYd�kmhhgjl�lg�F?Gk�kaf[]�)110&�O`ad]�l`]�;9>�`Yk�alk�jgglk�af�l`]�MC$�l`]�J?NF�ak�hgkkaZdq�l`]�Õjkl�NH�gj_YfarYlagf�lg�Z]�k]l�mh�af�Af\aY&�Al�oYk�hjgegl]\�Zq�A>;A�Dl\&�af�)11($�oal`�A<:A$�F9:9J<�and the Tata Social Welfare Trust as the co-sponsors. Subsequently, the RGVN adopted a capacity-building YhhjgY[`�lg�fmjlmj]�alk�hYjlf]j�KHGk�af�)110$�oal`�l`]�>gj\�>gmf\Ylagf�hjgna\af_�l`]�j]imaj]\�ÕfYf[aYd�assistance to it to launch the latter’s capacity-building programs. The RGVN initiated its Fellowship Hjg_jYe�Yk�]Yjdq�Yk�)11-$�oal`�l`]�gZb][lan]�g^�


“expanding the pool of capable people to enhance the capabilities of NGOs.” In the last decade, many foreign VPs have also set up their operations in India and the sector has, on the whole, become clearer and more advanced in its search for and selection of credible SPOs that can make a scalable impact.

The following section documents the broad characteristics of this evolving sector in India.

Market dynamics At present, it is estimated that VP and allied gj_YfarYlagfk�`Yn]�afn]kl]\�MK�.((�eaddagf�lg�MK�0((�eaddagf�af�KHGk�af�Af\aY$�Yf\�00��g^�the respondents are expected to increase their investments in the country in the next two years. (Source: Ernst & Young’s AVPN India VP ecosystem mapping survey, January 2012)

Furthermore, VP and allied organizations have formed a collaborative relationship with established grant-making foundations and charitable trusts. In addition, foreign and Indian charitable foundations Yj]�eYcaf_�ka_faÕ[Yfl�[gfljaZmlagfk�lg�l`]aj�j]kgmj[]k� >a_mj]�.!&�>gj�afklYf[]$�l`]�=\egf\�\]�Rothschild Foundation earlier partnered with the Acumen Fund to support the latter’s fellowship hjg_jYe�Yf\�`Yk�j][]fldq�^mf\]\�MfDl\&�Af\aY�to test pilot its VP approach to supporting new social enterprises in the country. The Foundation’s afn]kle]fl�af�MfDl\&�Af\aY�ak�af�daf]�oal`�alk�global shift toward a more strategic approach lg�h`adYfl`jghq$�o`a[`�al�afalaYl]\�af�*((,Ç(-&�According to Pauline Cavillot, Project Manager, Social Enterprise Portfolio — India of the Edmond de Rothschild Foundation, “We believe that the venture philanthropic approach is quite interesting

and needs to be explored further to complement the traditional philanthropic efforts of a foundations like ours. The social enterprise sector can prove to be an interesting addition to our other philanthropic engagements in India as well as globally.”

Furthermore, our research reveals that 84% of

the promoters of VP and allied organizations have previous experience in the social sector. They have adopted the investment approach to select and manage their SPOs’ portfolios as the best way of promoting social innovations that can help to alleviate the socio-economic conditions in the country. Irrespective of the terminology used in describing themselves, these organizations seek to nurture their investee SPOs by working in a highly focused and engaged manner. They focus gf�[j]Ylagf�g^�kg[aYd�Yf\�ÕfYf[aYd�nYdm]�^gj�l`]aj�multiple stakeholders — be they the strategic customers of their investee SPOs, the management or employees of SPOs, contributors to their funds or society at large.

Foreign13

6 6 7 31

135

5 5Indian

Gran

t mak

ing

foun

datio

ns/

char

itabl

e tr

ust

Com

pani

es/

CSR

arm

s of

co

mpa

nies

Priv

ate

equi

ty/

Vent

ure

cap

italit

s/

Hed

ge f

unds

Gove

rnm

ent a

id

agen

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(Uni

late

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Bila

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Indi

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Figure 5: Investors in VP and allied organizations


41.7%

41.7%

66.7%

25.0%

12.5%Hybrid (Any combination of debt, equity, grant)

Quasi Equity (for e.g. revenue participation,

royalty agreements etc.)

Debt/Loans (Patient Capital : At easy

repayment terms and favourable interest rates)

Grants (Non refundable

Equity

Figure 6: Financial instruments used by VPs and allied

organizations in India



Investment preference and strategies Investment instruments: Equity has gained the top spot as the preferred instrument for VPs to invest in SPOs, with grants and debt capital at the second spot. This preference for equity investments is in accordance with that of investment in commercially oriented SPOs.

Investment target

�� KHGk$�o`gk]�eg\]dk�`Yn]�Z]]f�nYda\Yl]\�Zq�l`]aj�gf%l`]%_jgmf\�]pakl]f[]�g^�log�lg�Õn]�years, command more interest than newer ones. Furthermore, although there is increasing interest in launching social sector incubators, given the k[Yd]�g^�l`]�Af\aYf�eYjc]l$�l`]j]�ak�ka_faÕ[Yfl�space for new entrants to invest in supporting start-up SPOs. (Figure 8).

�� Mf\]jdafaf_�l`]�aehgjlYf[]�g^�]fkmjaf_�l`]�dgf_%term sustainability of their investee SPOs, the majority of Indian VP and allied organizations show a strong preference for SPOs that have in-built revenue models to help them recover costs and become scalable over a period of time. >a_mj]�1!&�

�� Investors prefer innovations in education and health, followed by livelihood initiatives (Table .!&�L`ak�af\a[Yl]k�Y�[d]Yj�af[dafYlagf�lg�\]Yd�oal`�issues related to poverty in the country. The key issues driving the social impact debate in India continue to be inclusion and quality of life. On one hand, we see the emergence of an integrated approach to providing solutions to poverty,

which can make economically less advantaged individuals become effective participants in the growing economy. On the other hand, the concept of social impact is widening, with many causes or ideas being generated and supported, o`a[`�eYq�fgl�kh][aÕ[Yddq�lYj_]l�l`gk]�Yl�l`]�Zgllge�g^�l`]�hqjYea\$�Zml�eYq�Z]�[dYkkaÕ]\�as social, since they aim to improve the quality of life of citizens in general. For example, Prof. Majumdar of the Tata Institute of Social Sciences points out that a group of his students is working gf�Õf\af_�kmklYafYZd]�kgdmlagfk�^gj�mjZYf�oYkl]�management. Their approach is not BoP-centric but is oriented to providing a safe and healthy option to those who can pay for disposal of the huge waste generated every day.

37.5%

54.2%

33.3%Established

organisations with 5+ years in operation

Growing organisations with 2 to 5 years in

operation

Promising organisations with less than 2 years in

operation

Initial/seed funding stage/incubation and support to new social

experiments and entrepreneurs

62.5%

Figure 7: Preferred stage for investing in SPOs in India



25.0%

85.0%

25.0%

25.0%

A

B

C

D

Preferred revenue model for social investment targetsWe prefer to:A — To invest in charitable organizations that do not charge for their products and services B — To invest in innovative organizations that can cover their cost and generate revenues to scale upC — To invest in quasi-commercial revenue models D — To invest in cross-subsidy models

Figure 8: Preferred revenue model for social investment targets

Kgmj[]2�=jfkl��Qgmf_Ç9NHF�Af\aY�NH�][gkqkl]e�eYhhaf_�kmjn]q$�BYfmYjq�*()*

LYZd]�-2�K][lgj�hj]^]j]f[]�Yf\�lYj_]l]\�Z]f]Ô[aYja]k

Sector preference Response

percentage

Education .*&-�

Health .*&-�

Employment generation/Sustainable livelihood programs

58.3%

Agriculture 50.0%

Financial inclusion 50.0%

Water 41.7%

Access to energy 37.5%

Sanitation 37.5%

LYj_]l]\�Z]f]Ô[aYja]k

Rural poor ..&/�

MjZYf�hggj 54.2%

;`ad\j]f� (Ç),�q]Yjk! 12.5%

Disabled 8.3%

Girl child 12.5%

Minorities/Tribal/Other ethnic or caste groups

4.2%

Women 25.0%

Qgml`� ),Ç*)�q]Yjk! 12.5%



Hjgnakagf�g^�fgf%ÕfYf[aYd�support and engagement levelVP and allied organizations provide a range of fgf%ÕfYf[aYd�k]jna[]k�lg�l`]aj�afn]kl]]�KHGk&�L`]k]�k]jna[]k�Yj]�[mklgear]\�lg�e]]l�l`]�kh][aÕ[�f]]\k�and requirements of the SPOs and are delivered in consultation with their management. With VPs mainly providing high-end services in-house, they hope to meet the apparent gap in availability of skilled human capital in the social sector.

LYZd]�.2�Hgjl^gdag�g^�fgf%ÔfYf[aYd�k]jna[]k�g^^]j]\�Zq�VPs and allied organizations

Hgjl^gdag�g^�fgf%ÔfYf[aYd�k]jna[]k�g^^]j]\�Zq�NHk�lg�l`]aj�afn]kl]]�KHGk& Response percentage

Networking opportunities 1-&-�

Executive coaching/Mentoring 81.8%

@]dh�oal`�j]Õfaf_�afn]kl]]kÌ�ÕfYf[aYd$�gh]jYlagfYd�Yf\�_gn]jfYf[]�hjg[]kk]k 77.3%

Human resource management (e.g., leadership development, headhunting, etc.) 77.3%

Fundraising strategy 72.7%

Strategy consulting -1&)�

Legal advice 54.5%

Change management 54.5%

Assistance and opportunities to investees for product innovation ,(&1�

Development of IT infrastructure 27.3%

Promotion and marketing of investee’s products and services 27.3%

Special advice e.g. mergers, franchising etc. 18.2%

=klYl]�eYfY_]e]fl� ]&_&$�`]dh�af�Zmad\af_$�j]flaf_�gj�Zmqaf_�l`]�g^Õ[]�khY[]! 1&)�

“We attempt to develop a deep understand-ing of the sector in which the organization is operating and the organizational eg\]d�^jge�emdlahd]�Yf_d]k�Yl�l`]�lae]�g^�eYcaf_�l`]�afalaYd�afn]kle]fl&�Mfd]kk�o]�\]]hdq�mf\]jklYf\�l`]�Zmkaf]kk�gj�ogjc�g^�l`]�gj_YfarYlagf$�o]�Yk�Y�l]Ye�ogfÌl�Z]�YZd]�lg�Y\\�fgf%ÕfYf[aYd�nYdm]�lg�l`]�gj_YfarYlagf�gn]j�l`]�dgf_�l]je&Ê�

Inderpreet Singh Chawla, LGT Venture Philanthropy


ak�l`]�egkl�hgkalan]�Ykh][l�g^�l`]�_jgoaf_�Õ]d\�g^�VP, since investee organizations are ensured of mentoring support, which provides them with the vital help required to further their objectives. Around /*��g^�l`]�j]khgf\]flk�hjgna\]�fgf%ÕfYf[aYd�kmhhgjl�to more than 80% of their investees. This is ample evidence that venture philanthropists have a close hands-on relationship with the social entrepreneurs and ventures they support, and thereby, drive innovative and scalable models of social change. While around 40% of venture philanthropists prefer seats on the boards of their investee SPOs, all are intimately involved at the strategic and operational levels rather than merely in the role of traditional fgf%hjgÕl�^mf\]jk&�

Given below is an analysis of engagement levels across the following triple parameters:

4. �Hjgnakagf�g^�fgf%ÕfYf[aYd�k]jna[]k

5. Frequency of contact

.&� Preference for board seats or for observer status in investees’ boards

This reveals that most VP and allied organizations have an active portfolio management policy in place in India. They develop close working relationships with the employees and managements of their investees and are involved in activities ranging from selection of CEOs and strategic planning to development of the latter’s IT infrastructure. This


41.66666667

45.83333333

12.5

High

Medium

Low


Figure 9: Level of engagement of VP and allied

organizations with their investee SPOs

Furthermore, the engagement horizon is essentially long term and is not less than two years in duration. This is in stark contrast to engagements entered by traditional grant-makers and aid agencies, which generally extend short-duration project-based support. VP and allied organizations understand the complexities of investing in the social sector, and are therefore not rigid in their approach to deciding on their investment horizon. They prefer to keep their options open and continue to review the length of their engagements, depending on circumstances relating to the SPOs under their management. Says Mr. Nimesh Sumati, Caring Friends, “Mostly, o]�hYjlf]j�oal`�_jYkk%jggl�fgf%hjgÕl�KHGk&�Kg$�af�gmj�[Yk]$�l`]�d]f_l`�g^�l`]�fgf%ÕfYf[aYd�kmhhgjl�varies depending upon the targeted cause and the competence levels of the founder. The competence level of these founders is different. Some of them are from very modest families, so they need more handholding and their need for capacity-building is much higher. Some of them are educated, in their middle age and have more experience, and therefore, are more mature, so there is not much of hand-holding required in such cases.”

Figure 10: Engagement horizon

0.0%

40.0%

45.0%

15.0%

0.0%


Selection criteria and due diligenceMost venture philanthropists place utmost importance on the quantum of social impact their hjgkh][lan]�afn]kl]]k�[Yf�eYc]&�L`]j]^gj]$�.-��of VP and allied organizations only make their investment decision after considering the market size of the social product or service offered by prospective investee SPOs. However, they are extremely concerned about the ability of their partner SPOs to deliver the promised impact. Therefore, the majority of them consider the sound strategies, skills and experience of their investees’ managements and their prospects for sustainability Yf\�_jgol`�Yk�l`]�egkl�ka_faÕ[Yfl�[jal]jaY�o`ad]�making their investment decision. Some VP and Ydda]\�gj_YfarYlagfk�Ydkg�j]Ö][l�gf�l`]aj�gof�YZadala]k�to add value to social ideas mooted by prospective investee SPOs, and accordingly, take a decision.

Table 7: Selection criteria for investment in an SPO

Selection criteria for investment in

SPOs

Response

Percentage

Sound business model and organizational strategy

87.0%

Skills and experience of investee management

0*&.�

Financial feasibility and sustainability ]&_&$�klYZadalq�g^�[Yk`�Ögo!

.1&.�

Prospect for organic growth and scalability

.1&.�

Market size of social product or service of investee

.-&*�

Innovation (social /technological innovation, innovative revenue/operational business models, etc.)

.(&1�

K[gh]�^gj�]Yjfaf_�ÕfYf[aYd�j]lmjfk�^gj�investors while creating a social impact

-.&-�


Venture philanthropists and allied organizations make extensive use of their own networks or portals to solicit applications from prospective investees. Their selection process comprises multiple levels, and once initial selection criteria are met, prospective investees are subjected to comprehensive due diligence metrics. Venture philanthropists understand that any lapses relating to their investees may have implications on the credibility and reputation of their organizations. Furthermore, this focus on strict due diligence can be attributed to the inclination of venture h`adYfl`jghaklk�lg�_]l�ja\�g^�af]^Õ[a]fl�KHGk�operating in India’s social sector, so that the former’s afn]kle]fl�]fYZd]k�l`]aj�lYj_]l]\�Z]f]Õ[aYja]k�lg�gain the maximum value.


Table 8: Preferred due diligence procedures

Preferred due diligence procedures Response percentage

Meetings with investees’ teams (individually with each key member) to identify and probe key issues

1)&/�

Kh][aÕ[�\m]�\ada_]f[]�im]klagffYaj]k 83.3%

Afl]jfYd�d]_Yd�Yf\�ÕfYf[aYd�l]Ye�l`Yl�helps with compliance issues and analysis of historical and projected information

83.3%

Reference checks on investee organizations and their teams

/1&*�

Mk]�g^�]pl]jfYd�[gfkmdlYflk�lg�`]dh�oal`�comprehensive due diligence

50.0%


Return expectations and performance measurements against benchmarksVP and allied organizations in India are increasingly _jYnalYlaf_�lgoYj\�Y\ng[Y[q�lg�_]f]jYl]�ÕfYf[aYd�returns. According to them, this will help the social sector achieve the following:

�� HjgÕl%eYcaf_�KHGk�oadd�Z]�YZd]�lg�YlljY[l�l`]�interest of a wide pool of investors, and thereby, be able to meet capital requirements for their future growth.

�� They will also be able to attract the best talent, since they will have adequate resources (generated internally) to pay skilled professionals. The availability of highly skilled human resources will help them achieve growth and ultimately enhance their social impact.

However, VP and allied organizations are collectively not ignorant about the complexities of investing in the social sector, and therefore, are reasonable

29.2%

12.5%

16.7%

41.7%

Social returns only (We are preparedto lose 100% of our invested amount).

Social returns along with completerefund of invested amount.

We target at least partial refund (<100%) of invested amount.

Financial returns over and above the investedamount are as important as social returns.

Figure 11: Return expectations of VP and allied organizations in India


in their expectations on the quantum and duration of returns. Inderpreet Singh Chawla, LGT Venture Philanthropy, explains further, “We do not always expect the invested amount back with returns (e.g., in the case of grants). Similarly, we do not have a hurdle rate in mind when investing in a social business. At the same time, return expectation becomes commensurate with the risk involved, but o]�Yj]�eaf\^md�g^�fgl�Yddgoaf_�Y�ÕfYf[aYd�j]lmjf�expectation to destroy the fundamental social mission of an enterprise or to distort the markets by overvaluing companies, simply because they have a social mission or inclination.”

Furthermore, among those who advocate the hgda[q�g^�ÕfYf[aYd�j]lmjfk$�l`]j]�k]]ek�lg�Z]�Y�preference for using the returns earned to further a fund’s objectives or deploy it partly to further social objectives and partly to pay back investors in their funds. However, given the tough conditions in which these funds invest, there is as yet no evidence of ka_faÕ[Yfl�hjgÕlk�Z]af_�_]f]jYl]\�Zq�Yfq�NH�Yf\�allied organizations.


As regards social returns, VP and allied organizations are explicit in their effort to develop metrics to e]Ykmj]�l`]�kg[aYd�aehY[l�g^�l`]aj�afn]kl]]k&�LYZd]�1�provides the various reasons for measuring the social impact outcomes of VP and allied organizations. 9dl`gm_`�-.��[dYae�lg�`Yn]�\]n]dgh]\�kg[aYd�aehY[l�measurement metrics (Figure 13), they agree that measurement of social performance is the most challenging aspect of their work, given the varied social causes their investee SPOs serve.

Explaining the company’s approach to measurement of social impact, Molly Alexander, Acumen Fund, klYl]\$�ÉO]�Z]_af�oal`�Y�\]Õf]\�k]l�g^�gmlhml�^gj�each company that is aligned with its business mission and from there work to extrapolate social outcomes. Take the case of clean drinking water. At the end of the day, the ultimate outcome of having clean drinking water is that people don’t get sick and children take less time off school, so education indices rise, and employment and income numbers rise as well. Now, as a set of data, that’s really \a^Õ[mdl�Yf\�]ph]fkan]�lg�Y[[]kk�Yf\�l`]j]^gj]�lg�measure. So, in the case of clean drinking water, what we do is that we measure the number of plants that our investee SPO has put up, so say 450 clean drinking plants across India serve up to 1000

37.5%

37.5%

25.0%

Distribute it entirelyamongst the investors

Re-invest it for the promotionof the fund’s objectives

We have a mixed use policy. (Partly used forpromoting social objectives and partly usedfor distribution to contributors to the fund.)


>a_mj]�)*2�HjgÔl�mladarYlagf�hgda[q�g^�Af\aYf�NH�Yf\�Ydda]\�gj_YfarYlagfk

people a day. That’s 450,000 with access to clean, affordable drinking water that didn’t otherwise have it. These are the measurable output and therefore the most concrete social impact outcomes.”

What makes measurement of social impact a challenging and ever-evolving task is that a standard checklist may not be applicable for all SPOs. Furthermore, international standards, such as Impact Reporting and Investment Standards (IRIS), are usually not 100% applicable in Indian conditions, since these lack Ö]paZadalq&�Oal`af�India, the issue of measurement of social impact requires an integrated approach that takes into account the social, political and economic dimensions of the impact.

Table 9: Major reasons for measurement of social impact

Major reasons for measurement of social impact

Response percentage

A\]flaÕ[Ylagf�g^�Z]kl�hjY[la[]k�that can help to scale social impact

81.0%

A\]flaÕ[Ylagf�g^�fgf%ÕfYf[aYd�support required by investees to enhance their reach and sustainability

57.1%

Investor reporting and use to raise future funds

57.1%

Targeted deployment of funds for maximum reach and sustainability

,/&.�

Weeding out of ideas that fail to deliver

14.3%


Figure 13: Availability of social impact measurement metrics with VP and allied organizations

56.5%

30.4%

0.0%

13.0%

Yes

We are in the process of developingperformance measurement metrics

We utilise the services of externalconsultants to measure the social

performance of our investees.

No



Exit management Most VP and allied organizations incorporate exit clauses when they structure deals. This is a standard practice that has been borrowed from the mainstream VC and PE industries to provide intensive but time-bound support. However, l`]�Õf\af_k�g^�l`]�kmjn]q�km__]kl�l`Yl�n]flmj]�philanthropists in India are not rigid in executing their exit strategies. They are fairly open to reviewing their exit clauses in accordance with the growth requirements of their investee SPOs. The most preferred exit clauses are either management buy-backs or selling out to other investors. However, the inclusion of IPO as an exit clause has not yet gained momentum, given that the industry is still at a nascent stage.

Figure 14: Exit planning

33.3%

50.0%

16.7%

We always plan for and discuss a planned

exit with investees.

But it is not rigid and we assess the need to

stay invested or exit from time to time.

No, we do not plan in advance.


Figure 15: Gaps in India’s VP ecosystem

�� Inabililty to reach grassroot organizations�� Geographic concentration of investees

�� Daeal]\�YnYadYZadalq�g^�ÕfYf[aYd�afl]je]\aYlagf�k]jna[]k�� Inadequate collaboration with academic institutions

Capacity constraints of VP and allied organizationsLow utilization of paid professional services for managing investee portfolios

Concerns relating to risk management

�� <]Zl�[gfkljYaflk�gf�ogjcaf_�[YhalYd�ÕfYf[]�g^�KHGk�� Issues related to FCRA limiting ability of domestic

VPfoundations to raise funds abroad

�� Absence of appropriate legislation for social businesses �� Relevance of SEBI’s proposed regulations on social

venture funds for VP funds�� Impact of proposed Direct Tax Code on management of

fgf%hjgÕl�KHGk


Analysis of

gaps in India’s

VP ecosystemThis section elaborates on the gaps in India’s VP ecosystem. We conducted a two-level analysis on the basis of standalone and comparative inferences drawn from the survey and interviews. This helped us identify the challenges faced by VP and allied organizations, and those that are being forced on it from outside. Identifying and recommending feasible strategic measures to solve these issues was however beyond the scope of our research. In our subsequent discussion in this section, we have initiated a dialogue to address these challenges.

Capacity constraints faced by VP and allied organizationsVP and allied organizations have been operating in India for around 10 years. This is an extremely short-time horizon as compared to the history of h`adYfl`jghq$�g^Õ[aYd�\]n]dghe]fl�YkkaklYf[]�Yf\�even CSR. While these organizations have been able to register themselves as being capable of delivering change, the real social change promised by the VP initiative has not been realized. In India, the VP “sector” is fragmented and there is a need to enhance the reputation, scale and effectiveness of SPOs. Furthermore, VP and allied organizations need to pay greater attention to the capacity and institutional progress of not only their “investee” SPOs, but of their own organizations as well.


Effective mobilization of human capital is the baseline for capacity-building in an organization. Our research indicated that VP and allied organizations l`Yl�`Yn]�egj]�l`Yf�Õn]�q]Yjk�g^�gh]jYlagfYd�experience in the country have a total of 377 investees under their management. However, only 11% of these organizations employ 15 or more k]fagj�]p][mlan]k�Yf\�egkl� ..�!�`Yn]�d]kk�l`Yf�)(�senior executives.

Table 10: Number of senior staff functionaries of VP

Yf\�Ydda]\�gj_YfarYlagfk�oal`�egj]�l`Yf�Ôn]�q]YjkË�operational experience

VP and allied

organizations

with more than

Ôn]�q]YjkË�operational

experience

Number of

senior staff

members

Number of

SPOs currently

under their

management

11% More than 15 �*.

23% 10 to 15 210

33% .�lg�)( .1

33% Less than 5 72


This clearly shows that fewer senior-level professionals have been employed by VPs as compared to the number of senior employees engaged by the investees currently under their management. It is the value addition brought in by the strategic staff members of VPs that can help their investee SPOs achieve the quality standards the VP initiative promises.

Development of internal capacity and resources in the short run may not be feasible for VP and allied organizations. They should therefore make a concerted effort to develop a pool of volunteers, who are drawn from senior-level personnel employed in VC and PE industries in the country, to build capacity in their organizations. However, mobilization of senior employees from the corporate and VC sectors to develop a credible volunteer pool needs to be a managed process after taking into account l`]�kh][aÕ[�^mf[lagfYd�j]imaj]e]flk�g^�afn]kl]]�portfolios.

Low utilization of paid professional services for managing investee portfoliosOne of the characteristic features of VP gj_YfarYlagfk�ak�l`]aj�hjgnakagf�g^�fgf%ÕfYf[aYd�services to suit the capacity-building and growth requirements of their investees’ portfolios. Around 1*��g^�l`]�j]khgf\]flk�o]�kmjn]q]\�Y_j]]\�lg�hjgna\]�fgf%ÕfYf[aYd�k]jna[]k$�Yf\�Y�n]jq�ka_faÕ[Yfl�eYbgjalq� 1)�!�hj]^]jj]\�lg�mk]�l`]aj�gof�]ehdgq]]k�lg�\]dan]j�fgf%ÕfYf[aYd�gf]k&�Gfdq�+.&,��o]j]�willing to employ paid external professional service hjgna\]jk�lg�hjgna\]�fgf%ÕfYf[aYd�k]jna[]k�lg�l`]aj�investee SPOs.


LYZd]�))2�Hjgnakagf�g^�fgf%ÔfYf[aYd�k]jna[]k

9hYjl�^jge�hjgna\af_�^mf\k$�\g�qgm�g^^]j�Yfq�fgf%ÕfYf[aYd�services to your investees?

Answer options Response percentage

Yes 1)&/�

No 8.3%

LYZd]�)*2�Hj]^]jj]\�[`Yff]dk�^gj�\]dan]jaf_�fgf%�ÔfYf[aYd�servicesWhat are your preferred channels for delivering

fgf%ÔfYf[aYd�k]jna[]k7� emdlahd]�Yfko]jk�Yddgo]\!

Answer options Response

percentage

Your own employees 1(&1�

A pool of unpaid volunteers 22.7%

Pro bono partnerships with various external service providers

,(&1�

HYa\�[gfkmdlYflk�lg�e]]l�l`]�kh][aÕ[�needs of your investees (experts, hjg^]kkagfYdk$�Y\nakgjq�Õjek$�]l[&!

+.&,�

“It is important to continuously analyse what is not working in the organisation and how we can correct/eliminate or change for improvement. I think we focus a lot on our presentation and what is working and all the positives that make us sellable vs where we are really having issues and need good advice/hand-holding. A lot of work is expected between meetings and we do not always have the support or the same understanding of the importance of the work done by fellow Board members or staff.”

Dottie Wagle, Salaam Balak Trust

As mentioned earlier in this report, SPOs \]egfkljYl]�Y�[d]Yj�hj]^]j]f[]�^gj�fgf%ÕfYf[aYd�support. However, they also pointed out that VP

organizations are themselves in the learning mode. Therefore, they feel that the employees of VP organizations adopt an experimental approach in dealing with them sometimes.

The scope of this research was not to collect and analyze data to demonstrate the impact of the involvement of VP organizations in the management and operation of SPOs. However, given the fact that most of them have limited capacity, we believe that budgeting to enable the use of external consultants at the time investments are structured may help a great deal in strengthening and building the core competencies of the investees.

Concerns relating to risk management In the case of traditional grant-making, a large amount of the social capital derived by a grant- giving foundation is enabled by virtue of its act of giving. The success or failure of projects for which foundations provide funds seldom has any effect d]_Yd$�ÕfYf[aYd�gj�j]hmlYlagfYd!�gf�l`]�`]Ydl`�g^�a foundation. In fact, VP and allied organizations make investments for a long period of time and take upon themselves the arduous task of ensuring a wide social impact. For VP and allied organizations, the challenge is not just to identify solutions, but lg�]fkmj]�l`Yl�l`]�a\]flaÕ]\�kgdmlagfk�\]dan]j�l`]�desired results. In their pursuit of desired social returns, it therefore becomes important for them to develop effective enterprise risk management solutions for their portfolio investees. The table below elaborates on the indicative risks that are part and parcel of investments in the social sector.


LYZd]�)+2�Jakc�^Y[lgjk�Ykkg[aYl]\�oal`�kg[aYd�afn]kle]fl

Jakc�[dYkk 9kkg[aYl]\�jakc�^Y[lgjk

Customer risk There is the risk of alienating the target customer due to the perception that high-quality services are fgl�Y^^gj\YZd]� ]kh][aYddq�af�l`]�;gkl�J][gn]jq�gj�>gj�HjgÕl�eg\]dk!&

Most SPOs follow the hybrid strategies of cost leadership and product differentiation. However, their products or services may not meet required quality standards or “actual” needs, which results in their ]f\�Z]f]Õ[aYja]k�Z]af_�ogjk]�g^^&�>mjl`]jegj]$�_an]f�af^gjeYlagf�Ykqee]lja]k�af�l`]�:gH�k]_e]fl$�l`]�]f\�Z]f]Õ[aYja]k�eYq�fgl�`Yn]�Y[[]kk�lg�e][`Yfakek�lg�j]n]jk]�l`]�\YeY_]�\gf]&�Làk�[Yf�alienate their customers further.

Marketing and distribution and risk

These are issues relating to assessment of the true market size, since data may not always be available at the time an investment is made.

This also relates to the establishment of a distribution and retail network that is targeted at the BoP segment. While most SPOs claim to serve the underserved, establishing a creditable distribution network that can help them enhance their impact by reaching a wide market continues to be a challenge for most of them.

Governance risk This includes credibility, accountability and transparency issues. These are usually managed by means of extensive due diligence procedures adopted at the time investments are made. After that, VPs manage governance risk by measures such as holding seats on the boards of investees and through regular reporting.

Process risk There is no consensus among industry players on the best practices for investment in the social k][lgj&�>mjl`]jegj]$�[j]Ylaf_�kmklYafYZd]�Yf\�k[YdYZd]�KHGk�ak�fgl�Y�k[a]flaÕ[�hjg[]kk�l`Yl�[Yf�Z]�replicated across sectors or even organizations operating in the same sector.

ImYflaÕ[Ylagf�g^�l`]�eYbgjalq�g^�jakc�[dYkk]k�Ykkg[aYl]\�oal`�afn]kle]flk�af�l`]�kg[aYd�k][lgj�eYq�fgl�be feasible. It leaves out a large number of qualitative risks that need to be analyzed and monitored on a regular basis.

Moreover, the historical data available is inadequate for developing statistically relevant quantitative risk models that will help the decision and performance management process of SPOs.

Project risk Làk�h]jlYafk�lg�l`]�jakc�g^�afljm\af_�gf�Yf�KHGkÌ�gZb][lan]k$�]kh][aYddq�o`]f�ÕfYf[aYd�j]lmjfk�Yj]�expected.

>mjl`]jegj]$�NHk�[Yf�]ph][l�nakaZd]�gml[ge]k� kg[aYd�Yf\�ÕfYf[aYd!�gfdq�af�l`]�dgf_�l]je$�oà[`�[Yf�stretch beyond the planned period of investment.

This includes the risk of investing in sectors or geographies about which adequate knowledge is not available in-house.

“In commercial investing, the goal is to increase hjgÕlk�g^�l`]�[gehYfq$�Yf\�^gj�l`]�afn]klgjk&�Af�venture philanthropy, the question that we and our entrepreneurs ask ourselves is how can we innovate further to maximize the social impact? Increase access and distribution, sure; but also how can we lower the price to increase access for even more low income customers? At the end of the day, for us, it’s about accessibility of these critical products and services to those that have lower and lower incomes.”

Molly Alexander, Acumen Fund

“All angel and seed-stage investing demands an incredible appetite for risk, and to include the imYdaÕ[Ylagf�l`Yl�qgmj�afn]kle]flk�\]dan]j�kg[aYddq�Yk�o]dd�Yk�ÕfYf[aYddq�ak�lg�af[gjhgjYl]�q]l�Yfgl`]j�reputational risk. As an industry, our challenge is lg�\]egfkljYl]�Zgl`�ÕfYf[aYd�Yf\�kg[aYd�j]lmjfk�that justify the amount of risk we take.”

Mark Hand, First Light India Accelerator


Therefore, given the extensive set of risk factors involved, the task of continuous risk mapping and appraisal across a portfolio of investees is extremely complicated for VP and allied organizations. (Please note that the list provided above is in no way comprehensive, but is merely illustrative of the risks involved in investing in the social sector.)

In addition, SPOs face the same commercial risks as any mainstream organization. However, there are many \an]jkaÕ]\�Yf\�kljm[lmj]\�jakc�Éeala_YflkÊ�l`Yl�Yj]�available to a mainstream organization. This is partly due to the effective risk management products and services eY\]�YnYadYZd]�Zq�ÕfYf[aYd�afklalmlagfk�lg�eYafklj]Ye�organizations working across various sectors. However, the cost of such instruments is prohibitive for SPOs, and therefore, as compared to mainstream organizations, they are at a disadvantage in managing their risks.

VP and allied organizations therefore focus on making a ka_faÕ[Yfl�kg[aYd�aehY[l�Yl�l`]�[gkl�g^�à_`�jakck&�@]f[]$�al�is essential that a culture of risk management is cultivated within VP organizations, as well as investee SPOs, to ensure the following:

�� KHGk�Z]af_�YZd]�lg�k]d^%a\]fla^q�hj]%oYjfaf_k�gf�“what can go wrong” instead of reporting “what has gone wrong”

�� Adequate information-capturing mechanisms in place to enable informed decision- making

�� L`]�loaf�a\]Ydk�g^�[gflafmgmk�aehjgn]e]fl�Yf\�]^Õ[a]f[q�Z]af_�af[gjhgjYl]\�oalàf�h]j^gjeYf[]%measurement systems to pave the way for their future growth

Geographic concentration of investeesGml�g^�l`]�*0�klYl]k�Yf\�/�Mfagf�L]jjalgja]k�af�Af\aY$�))�klYl]k�Yf\�)�Mfagf�L]jjalgjq�`Yn]�oalf]kk]\�afn]kle]flk�made by 50% or more of VP and allied organizations operating in the country. Our research suggests that there is a further need to expand the geographic presence of investee portfolios. Furthermore, given the fact that India is a diverse country, with its socio-economic and political landscape varying from state to state, reaching innovative SPOs in different states may require different strategies, and therefore, be directly linked to the institutional and capacity-building needs of VP and allied organizations.

Table 14: Geographic preference of VP and allied

organizations in India

State Preferred states

for VP investment

Karnataka 75%

Maharashtra 75%

Orissa .(�

Bihar 55%

Madhya Pradesh 55%

Rajasthan 55%

Tamil Nadu 55%

MllYj�HjY\]k` 55%

Andhra Pradesh 50%

<]dà� ML! 50%

Gujarat 50%

West Bengal 50%

Assam 35%

MllYjYc`Yf\ 30%

Chattisgarh 25%

State Preferred states

for VP investment

Haryana 20%

Kerala 20%

Jharkand 15%

Punjab 15%

Himachal Pradesh 10%

Jammu and Kashmir 10%

Manipur 10%

Hm\m[`]jjq� ML! 10%

Arunachal Pradesh 5%

<YeYf�Yf\�<am� ML! 5%

Goa 5%

Meghalaya 5%

Mizoram 5%

Nagaland 5%

Sikkim 5%

Tripura 5%

9f\YeYf�Yf\�Fa[gZYj�AkdYf\� ML! 0%

;`Yf\a_Yj`� ML! 0%

<Y\jY�Yf\�FY_Yj�@Yn]da� ML! 0%

DYck`Y\o]]h� ML! 0%



Inability to reach grass root organizations In India, VP is at a nascent stage of evolution. As e]flagf]\�]Yjda]j$�Y�ka_faÕ[Yfl�fmeZ]j�g^�NHk�operating in the country that have a limited capacity have not been able to cover the length and breadth of the country as yet. Furthermore, their deal-sourcing procedures are limiting their ability to reach grassroot organizations. Most of these source potential deals through websites and networks, and there are some that do not entertain unsolicited proposals at all. While VP respondents keep continuous track of their databases and screening lggdk$�l`]q�Y_j]]�l`Yl�\]n]dghaf_�Y�[j]\aZd]�\]Yd�Ögo�and accessing additional grassroot organizations is a challenge in the country. They also acknowledge that the various forums and networks highlight the same set of SPOs and solutions year after year.

The selection criteria and due diligence procedures adopted by VP and allied organizations have helped them select the best SPOs. However, in the Indian [gfl]pl$�km[`�kljaf_]fl�hjg[]\mj]k�eYq�Õdl]j�gml�grassroot SPOs, which may have the potential of creating a substantial impact, but may be outside the network due their inability to “speak the right language.”

Prof. Majumdar of the Tata Institute of Social Sciences recognizes the fact that the stress on scalability of SPOs restricts grassroot organizations from availing the support provided by VPs. Moreover, given that India is a diverse country, solutions applicable for one area may not be suitable for another, which renders the concept of scalability redundant. However, this does not mean that indigenous solutions to suit local problems should not be encouraged. In fact, supporting such solutions can `Yn]�ka_faÕ[Yfl�hgl]flaYd�^gj�[j]Ylaf_�l`]�j]imaj]\�social change in the country.

A focus on the commercial aspect (even if it is limited to cost recovery), rather than on whether a kgdmlagf�ak�l`]�Z]kl�Õl�^gj�Y�hjgZd]e$�eYq�j]kmdl�af�areas of crucial social reforms being neglected. Says Inderpreet Singh Chawla, LGT Venture Philanthropy, “There are issue areas where markets seem to function quite well and social purpose organisations are actually up against serious competition, e.g., in the micro-drip irrigation sector, whereas there are other social contexts where markets do not function at all, e.g., girls’ education in rural areas. To expect an organization to have a revenue model in such a context would be unfair.”

It is not always the credibility issue that prevents a grassroot SPO from making an impact. Neither is it that the founders and managers of such SPOs are totally incompetent. In fact, in certain contexts, such as in building a relationship with targeted Z]f]Õ[aYja]k$�l`]q�eYq�Z]�^Yj�egj]�j]daYZd]�Yf\�competent. However, the stringent selection criteria of VPs, as articulated on their websites, may be too intimidating for grassroot SPOs and make them uncomfortable about approaching the former. Furthermore, there may be lack of a personal touch and approach at the initial stages, which may discourage SPOs from seeking VPs. The solution is therefore to ensure that VPs proactively explore grassroot SPOs, impart adequate knowledge and provide guidance to help them develop their performance standards, and then expose them to the VP marketplace.

L`]�Z]f]Õlk�g^�[dgk]�Yf\�]f`Yf[]\�Ykkg[aYlagf�oal`�_jYkkjggl�KHGk�eYq�mdlaeYl]dq�Z]f]Õl�kg[aYd�enterprises that are supported by VP and allied organizations. Moreover, a credible and cost- effective relationship with such organizations may help in the creation of robust distribution networks in hitherto unreachable regions in the country, to market the products and services of social enterprises funded by VP and allied organizations


Case noteReaching grassroot SPOs by using “on the ground due diligence”

Caring Friends and Bhagini Niveditha Gramin Vigyan Niketan

Nilima Mishra

BNGVN

Caring Friends is an informal network of 300 individuals with a chapter in Mumbai and upcoming chapters in Pune and Bangalore. It provides ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�kmhhgjl�lg�_jYkkjggl�organizations working in rural areas, to help them maximize their social impact. As on date, Caring Friends manages 30 SPOs in 8 Indian states. It has chosen not to register itself under any Indian law and its due diligence procedure involves testing the social concept of an SPO on the ground rather than on paper. It constantly scouts for grassroot SPOs, familiarizes itself with their concept of social impact, provides them with initial grants and “keeps” them within a “probationary period” under appropriate guidance. If the performance of an SPO is satisfactory during the probation period, it becomes eligible to receive additional substantial support from the network.

Bhagini Niveditha Gramin Vigyan Niketan (BNGVN) is an NGO working in the area of women’s empowerment through income-generation programs, as well as holistic development of villages by the formation of self-help groups and ea[jgÕfYf[]�^gj�k]d^%kmklYafYZadalq&�Al�ogjck�af�^gmj�districts including Nashik, Dhule, Nandurbar and Jalgaon in Maharashtra. Over the past 10 years, BNGVN has helped to create a village revolving fund that provides loans for farm input and emergency needs, has addressed health problems

by constructing 300+ private and communal toilets, and most importantly, activated village assemblies to discuss and resolve local needs.

BNGVN’s Founder President,Nilima Mishra, won the Magsaysay Award for her work in 2011. With a Master’s degree in clinical psychology, Nilima founded BNGVN with the concept that the problems faced by villages must be addressed by the communities from within them. In 2000, when BNGVN was initiated, Nilima was struggling to gj_Yfar]�j]kgmj[]k�È�ÕfYf[aYd�Yf\�fgf%ÕfYf[aYd�È�l`Yl�ogmd\�`]dh�lg�fmjlmj]�`]j�Ö]\_daf_�a\]Y&�Af�her initial effort to make the organization and its goals a success, she ended up incurring a personal debt of INR1, 50,000, but was still not successful in establishing the organization she wanted to set up. It was at this juncture that she got in touch with Ramesh Kacholia of Caring Friends. “I went to him and was pleasantly surprised when he gave a patient ear to my struggle at the village level. That moment, without actually visiting the project area, he sanctioned some token donation. Later, he sent his representative to inspect the initial results of our work and when he got a satisfactory report, he started supporting us wholeheartedly. Since that day, we have received constant support from Caring Friends, which has helped tremendously in shaping the success of BNGVN.”


Limited availability of ÕfYf[aYd�afl]je]\aYlagf�servicesIndia has seen the emergence of organizations that Yj]�k]jnaf_�Yk�ÕfYf[aYd�afl]je]\aYja]k�gj�afn]kle]fl�ZYfck�lg�]fYZd]�Ögo�g^�[YhalYd�lg�KHGk&�L`]k]�kg[aYd�investment banks began by catering to the needs of ea[jgÕfYf[]�afklalmlagfk�Yf\�egn]\�gf�lg�hjgna\]�buy-side advisory services to foreign social sector investors interested in innovative social ventures af�Af\aY&�Lg\Yq$�l`]k]�ÕfYf[aYd�afl]je]\aYja]k�Yj]�increasingly providing sell-side advisory services to social enterprises that have been in existence for some time, and are looking at raising their growth capital to scale up their operations further.

Such services are indeed critical for social entrepreneurs, who, unlike VPs, may not understand the nuances involved in negotiating term sheets, shareholder’s agreements, etc. For VPs and allied organizations, these institutions provide sector knowledge and enable expanded relationships, and sometimes, even help to bring in mainstream VCs as co-investors in social enterprises.

@go]n]j$�ÕfYf[aYd�afl]je]\aYja]k�Yj]�kladd�^]o�af�number, and consequently, their collective reach in the VP ecosystem is fairly limited. Moreover, they have not yet tailored their services to suit the needs of seed-stage social entrepreneurs, since they have substantial business available to them from existing social businesses. They have yet to adapt their business models to provide services, e.g., jYakaf_�h`adYfl`jgha[�[YhalYd�^gj�fgf%hjgÕl�KHGk�af�Y�professional manner. According to Anurag Aggarwal

of Intellecap, “We believe that the evolving concept of venture philanthropy in India has multiple shades. L`]�^gj%hjgÕl�Yf\�l`]�fgl%^gj%hjgÕl�gj_YfakYlagfk�are two ends of a spectrum that operates in a continuum, and it’s not one versus the other. In both cases, the key issue is the governance, transparency Yf\�]^Õ[a]f[q�g^�[YhalYd�\]hdgqe]fl&�9l�Afl]dd][Yh$�o]�Õf\�l`Yl�l`]j]�ak�Y�k][lagf�g^�kg[aYd�afn]klgjk�that is not averse to making grants and donations to fgf%hjgÕlk$�Yf\�kge]lae]k$�l`]q�Yj]�oaddaf_�lg�dggc�Yl�]n]f�_anaf_�l`]�kYe]�_jYflk�lg�^gj%hjgÕl�]flala]k�lg�`]dh�l`]e�Y[`a]n]�\a^Õ[mdl�kg[aYd�gml[ge]k&�A�think this is where social investment bankers and transaction advisory consultants like us can help to bring in knowledge and relationships, to help social enterprises and investors/donors achieve their end objectives.”

The following scenario prevails at present:

�� Financial intermediaries are limited in number and small in size.

�� Their services continue to be under-marketed to venture philanthropists and SPOs.

�� They are still far from the stage when they can provide services including “underwriting” or “market-making” that mainstream investment banks normally do.

However, there is the increasing realization that creation of social change on a large scale requires an equally large amount of capital (routed through credible channels). Further development of such intermediaries is therefore required to help in eYaflYafaf_�Y�keggl`�Ögo�af�\]hdgqe]fl�g^�[YhalYd�to SPOs.

Inadequate collaboration with academic institutions One of the major concerns for the social sector has always been availability of talent. Even VP and allied gj_YfarYlagfk�[gf[]\]�l`Yl�al�ak�\a^Õ[mdl�lg�Y[[]kk�the right talent pool to build their internal capacity and meet the human resource requirements of their investees. Given the expansion of the Indian economy, it can be challenging to lure mid- level professionals from their assured and well-paying career paths to the social sector. Although there is no doubt that some mid-level professionals have made this career move in their search for higher goals, the mass deployment of professionally trained human resources the sector requires may not take place if proactive efforts are not made to attract young people qualifying from the country’s academic institutions.

It is therefore of utmost importance that VP and allied organizations build strategic partnerships with higher learning institutes to tap young talent emerging from them. Such partnerships should be aimed at ensuring that the country’s youth begin to seriously consider the social sector’s potential to provide viable employment and professional growth opportunities to them. While these youngsters may be short on professional work experience, they have the right professional training, which can help them learn rapidly and render useful service in minimal time. Furthermore, in-house training and mentoring programs developed by VPs can help these young recruits contribute to the best of their ability to the mission espoused by VP and allied organizations.


Therefore, VP and allied organizations should focus their efforts on partnering with academic institutions, especially those in tier II and tier III towns. Their efforts need to be aimed at developing credible programs that pertain to investment in and management of such investments in the social sector. Moreover, most students studying in tier II and tier III institutes have real-time experience of the challenges being faced in the segment, and, with the right training and guidance, they can be valuable resources for bringing about desired social change in the country.

Debt constraints relating lg�ogjcaf_�[YhalYd�ÕfYf[]�for SPOs GZlYafaf_�ogjcaf_�[YhalYd�ÕfYf[]�^gj�l`]aj�\Yq%lg%day operations continues to be the biggest challenge facing SPOs in India. The fact that the property gj�Ykk]lk�g^�Y�fgf%hjgÕl�KHG�[Yffgl�Z]�g^^]j]\�as collateral limits its ability to raise funds from mainstream commercial sources.

A VP organization that is registered in India can hjgna\]�^mf\k�lg�Y�fgf%hjgÕl�KHG$�Zml�fgl�^gj�the latter to meet its working capital needs. Such ÕfYf[]�[Yf�Z]�YnYad]\�Zq�Yf�KHG�lg�Zmad\�Ykk]lk$�but not for purposes such as paying staff salaries. VP organizations can only provide funds in the form of general donations to meet the working capital requirements of SPOs.

>mjl`]jegj]$�fgf%hjgÕl�KHGk�Yj]�fgl�[gn]j]\�mf\]j�the automatic route to raise external commercial borrowings (ECB) from foreign VP organizations. Mf\]j�l`]�YhhjgnYd�jgml]$�gfdq�l`gk]�l`Yl�Yj]�]f_Y_]\�af�ea[jgÕfYf[]�Y[lanala]k�Yj]�]da_aZd]�^gj�raising ECB. However, utilization of ECB is explicitly

prohibited to meet working capital requirements as well as for general corporate purposes and repayment of existing rupee loans.

In the case of social businesses registered in India, a foreign VP organization can provide debt funding, but only after seeking the status of “recognized lender” according to ECB rules. The use of such funds as working capital is explicitly prohibited.

Issues related to Foreign Contribution (Regulation) Act, 2010 regulating ability of domestic VP organizations to raise funds abroadVP organizations that want to register themselves af�Af\aY�Yk�fgf%hjgÕl�]flala]k�^Y[]�hjg[]\mjYd�akkm]k�while registering under the Foreign Contribution Regulation Act (FCRA). Furthermore, it is not easy for such organizations to approach philanthropic investors outside the country, since the FCRA prohibits opening of accounts in foreign countries for the purpose of obtaining funds. Only two options are therefore available to them in this context:

�� K]llaf_�mh�Yf�af\]h]f\]fl�kakl]j�gj_YfarYlagf�abroad that will raise funds on behalf of the Indian entity and transfer these to the latter

�� Making an arrangement with a fund-raising group or attorney abroad, who will raise funds on its behalf and transfer these to the designated Indian account of the VP organization (Such an arrangement requires mandatory clearance from the RBI and the FCRA.)

However, both these options are expensive, since separate arrangements may need to be made to tap and obtain funds from foreign countries.

A present, there is no separate legislation in India that governs VP organizations and social businesses.

Relevance of proposed Securities and Exchange Board of India’s (Alternative Investment Fund) Regulations, 2011The Securities and Exchange Board of India’s (SEBI”s) (Alternative Investment Fund) Regulations, 2011 were proposed in August 2011 to “regulate the formation of investment funds that raise capital from a number of High Net Worth investors, with Y�na]o�lg�afn]klaf_�af�Y[[gj\Yf[]�oal`�Y�\]Õf]\�investment policy.” These regulations recognize social venture funds (SVFs) as featuring among the categories that will be covered under the proposed j]_mdYlagfk�Yf\�\]Õf]�l`]k]�Yk�Z]af_�lYj_]l]\�Yl�social investors, who are willing to accept muted returns of 10% to 12%.

The draft regulations propose mandatory registration of all types of alternative investment vehicles (including social venture funds) that raise their investment funds from the domestic market. Some of the prominent features of the proposed regulations relating to alternative investment funds (including social venture funds) are as follows:

�� L`]�\jY^l�hjghgk]k�Y�^jYe]ogjc�^gj�KN>k�Zq�\]Õfaf_�l`]e�Yk�^mf\k�l`Yl�hjgeak]�eml]\�returns of 10% to 12% to their investors (by


afn]klaf_�af�Yj]Yk�km[`�Yk�ea[jgÕfYf[]�lg�Y[`a]n]�the social performance requirements established by the fund).

�� The funds are close-ended and fund management is required to seek the approval of SEBI for any revision made during its tenure, which is a eafaeme�g^�Õn]�q]Yjk&�9fq�]pl]fkagf�lg�alk�afalaYd�tenure is only permitted if 75% of the investors approve it. This can be extended for a period of up to two years at a time.

�� The minimum investment an investor is required to make in a fund has been proposed at 0.1% of its size, but in no event is this amount to be less than INR10 million. A minimum investment criterion has been proposed to ensure that retail investors are not lured into investing in such funds.

�� The maximum number of investors in a fund is not to exceed 1000, and if it is constituted as a limited liability partnership (LLP), the number of investors is limited to 50.

�� SVFs have been exempted from the requirement of a lock-in period of one year in the case of pre-IPO investments.

�� Alternative investment funds (including social venture funds) are required to raise a minimum of INR200 million. The total size of a fund is not to exceed INR2.5 billion.

Foreign alternative investment funds (i.e., those that have raised money abroad) seeking to invest in India will continue to be governed by SEBI’s

Foreign Venture Capital (FVCI) Regulations, wherein registration requirements are optional and the concerned entity can choose to avail of l`]�Z]f]Õlk�YnYadYZd]�mf\]j�>N;A�j]_mdYlagfk�gj�route their investments through the FDI route. The concept paper on proposed AIF regulations however mentions that these may be amended to enable FVCI to invest in different AIFs, such as the SME Fund and social venture funds, in addition to domestic VCFs.

It is commendable that SEBI has recognized the need to encourage socially relevant investments in the country. However, while devising these mandatory registration requirements, it has treated SVFs at par with other alternative investment vehicles.


Figure 16: Exit experience of investee SPOs failing to meet their targeted social impact

39.1%

34.8%

Not concerned about the social performance of SPO

0.0%

Yes and we exited such SPOs

26.1%Yes, but we extended the time period of such SPOs

No, we have not faced such a situation


possible that the fund managers of SVFs may have to make forced and premature exits, and thereby, jeopardize their primary social mission. Furthermore, India’s capital market for social sector investments is yet to develop, which necessitates that the issue of SVFs exiting social investees is treated with the utmost sensitivity.

SEBI needs to recognize the fact that it is the mission of SVFs to make a social impact and _]f]jYl]�ÕfYf[aYd�j]lmjfk&�L`]k]�^mf\k�g^l]f�invest in businesses that operate in challenging kg[ag%][gfgea[�[gf\alagfk&�L`]�ÕfYf[aYd�j]kgmj[]k�available for investments in the country’s social sector and subsequent returns that can be generated are far less, as compared to other alternative investment vehicles. Therefore, SEBI needs to make appropriate regulatory concessions to ensure the healthy growth of domestic social venture funds. While ensuring investors’ interests, it should also ensure that mandatory registration requirements do not add to the administrative cost of SVFs. >mjl`]jegj]$�al�j]eYafk�lg�Z]�k]]f�o`Yl�Õk[Yd�Yf\�tax incentives will be provided by the Government to SVFs registering under SEBI’s proposed legislation.

Absence of appropriate legislation for social businesses9k�^Yj�Yk�kg[aYd�Zmkaf]kk]k�Yj]�[gf[]jf]\$�^gj%hjgÕl�social businesses can be incorporated under the HYjlf]jk`ah�9[l$�)1+,�gj�l`]�;gehYfa]k�9[l$�)1-.�under Indian law. Furthermore, in order to promote small and medium enterprises, the legislature has recently passed the Limited Liability Partnership Act, 2008, which provides for the establishment of an alternative corporate entity (with the limited

It should however consider the impact of the ^gddgoaf_�hjghgkYdk�gf�l`]�[gmfljqÌk�Ö]\_daf_�kg[aYd�venture funding scenario:

�� The sponsor of a fund is required to make a compulsory investment that is equal to at least 5% of the investment. Furthermore, the sponsor’s investment in the fund is locked in till its redemption by the last investor in it. This limit is fairly restrictive, particularly in the case of non-institutional sponsors.

�� ?an]f�l`]�^Y[l�l`Yl�al�ak�af�Yfq�[Yk]�\a^Õ[mdl�lg�raise funds for social investments due to muted returns and the long gestation period involved, the ceiling on the minimum investment criterion

and the largest number of investors in the fund is restrictive for domestic social venture funds.

�� L`]�hjgnakagf�j]dYl]\�lg�l`]�Õp]\�l]fmj]�g^�l`]�fund and requirements for its extension does not match investment requirements in the social sector.

Gmj�j]k]Yj[`�j]n]Yd]\�l`Yl�+1��g^�NH�Yf\�Ydda]\�organizations operating in India exit their investees a^�l`]�dYll]j�`Yn]�^Yad]\�lg�Y[`a]n]�\]Õf]\�kg[aYd�impact outcomes within the period set. However, *.��k]fkalan]dq�YfYdqr]\�l`]�kalmYlagf�j]khgfkaZd]�^gj�the failure of their investees to meet social targets, and accordingly, extended their tenure. Given the j]_mdYlgjq�j]imaj]e]fl�g^�Y�Õp]\�l]fmj]�Yf\�l`]�hj]kkmj]�gf�_]f]jYlaf_�ÕfYf[aYd�j]lmjfk$�al�ak�imal]�


daYZadalq�Z]f]Õlk�g^�Y�[gehYfq$�Zml�l`]�Ö]paZadalq�g^�a management structure that is similar to that of a partnership). However, none of these Acts currently eYc]�Yfq�kh][aYd�hjgnakagfk�^gj�gj�[dYkkaÕ[Ylagfk�_gn]jfaf_�^gj%hjgÕl�eYcaf_�]fl]jhjak]k�l`Yl�afn]kl�af�social causes. Due to non-recognition of the statues of a hybrid form of business with special needs, the social business sector does not receive any kh][aYd�Õk[Yd�af[]flan]k�mf\]j�l`]�hjgnakagfk�g^�lYp�j]_mdYlagfk�af�Af\aY&�9dl`gm_`�l`]j]�eYq�Z]�kh][aÕ[�Z]f]Õlk�Yf\�kmZka\a]k�j]dYl]\�lg�l`]�k][lgj�af�oà[`�the social business operates, these are only limited to a few sectors, e.g., solar energy. A social business already has the uphill task of proving its business model by generating returns while maintaining the sanctity of its social mission. With the absence of kh][aYd�Õk[Yd�af[]flan]k$�l`]k]�gj_YfarYlagfk�^Y[]�Y�further hurdle in achieving their objectives.

In their effort to develop special legislation for social businesses, policy framers can learn from similar d]_akdYlagf�af�[gmflja]k�km[`�Yk�:]d_ame$�l`]�MC�Yf\�l`]�MK$�l`]�l`j]]�[gmflja]k�l`Yl�`Yn]�Ydj]Y\q�implemented laws for governing social businesses. Af�)11-$�l`]�:]d_aYf�HYjdaYe]fl�hYkk]\�Y�kh][aYd�legislation to create a new format called the Societe A Finalite Sociale (SFS) for commercially oriented kg[aYd�]fl]jhjak]k&�L`]�MC�?gn]jfe]fl�afalaYl]\�the Community Interest Company (CIC), which is in essence similar to any other limited company, but restricts its activities to serve a social interest as part of the Government’s Companies Act 2004. In 2008, l`]�MK�]fY[l]\�d]_akdYlagf�Yddgoaf_�kg[aYd�Zmkaf]kk]k�lg�j]_akl]j�l`]ek]dn]k�Yk�Dgo%HjgÕl�Daeal]\�Liability Companies (L3C). These enactments allow investment of private capital for social purposes and at the same time provide an uncomplicated regulation structure for governing social businesses. L`]�MCÌk�hgda[q�kljm[lmj]�`Yk�Z]]f�egj]�km[[]kk^md�

than that of the other countries mentioned above, since it focuses on creating enhanced awareness of the social enterprise sector, and at the same time, has created additional capital sources for social enterprises.)1

Af\aYÌk�d]_akdYlagfk�j][g_far]�]al`]j�^gj%hjgÕl�gj�fgf%hjgÕl�]flala]k�Yf\�Y[[gj\af_dq�hj]k[jaZ]�jmd]k$�regulations and development schemes for these traditional forms. However, the country’s current regulations inadequately recognize, understand and cater to the special developmental needs of this hybrid model, which clubs the commercial with the social.

Provisions of DTC and their implications on non-hjgÕl�KHGkThe proposed Direct Tax Code seeks to simplify l`]�[mjj]fl�lYp�]p]ehlagf�j]_ae]�^gj�fgf%hjgÕl�organizations. However, certain provisions of the proposed regulation are likely to place hurdles in the hYl`�g^�gj�hgk]�[`Ydd]f_]k�^gj�l`]�_jgol`�g^�fgf%hjgÕl�SPOs in India.

Mf\]j�l`]�[g\]$�Y�fgf%hjgÕl�gj_YfarYlagf�ak�Yddgo]\�to carry forward only 15% of its total income (gross receipts reduced by outgoings) or 10% of its gross receipts, whichever is higher. The income carried forward however needs to be utilized within a period of three years. While it can be argued that this will ]f[gmjY_]�fgf%hjgÕl�gj_YfarYlagfk�lg�Z]�egj]�hjgY[lan]�Yf\�]^Õ[a]fl�af�l`]aj�mk]�g^�^mf\k�lg�hjgegl]�their cause, it may limit their ability to undertake kh][aÕ[�kYnaf_k&�Làk�ogmd\�af�]^^][l�`Yn]�Y�dgf_%l]je�

)1�<g]jaf_]j$�EYll`]o�>&3� *()(!3�É>gkl]jaf_�Kg[aYd�=fl]jhjak]2�9�Historical and International Analysis”; Duke Journal of Comparative Yf\�Afl]jfYlagfYd�DYo3�Ngd&�*(3�Fg&�*3�H_k&�*1)%+*1&

effect on their scalability and sustainability efforts, and they will have to mobilize such funds year on year. The current provisions permit up to 100% carry forward of the current year’s income (with the option g^�j]lYafaf_�)-��af\]Õfal]dq!&�>mjl`]jegj]$�làk�ak�Yddgo]\�^gj�Y�h]jag\�g^�Õn]�q]Yjk�Yk�Y_Yafkl�l`]�three-year period proposed by the DTC. Moreover, fgf%hjgÕl�KHGk�[mjj]fldq�`Yn]�l`]�^j]]\ge�lg�mk]�receipts received at any time of the year during the subsequent year. However, the application of DTC oadd�j]kmdl�af�oal`\jYoYd�g^�làk�Ö]paZadalq�Yf\�gfdq�l`]�amount received in the last month of the year being allowed to be utilized during the following year.

Lg�]fkmj]�l`]aj�kmklYafYZadalq$�fgf%hjgÕl�organizations have been experimenting with cross-subsidy models worldwide. Consequently, there are ]pYehd]k�g^�fgf%hjgÕl�KHGk�l`Yl�k]dd�Y[[]kkgja]k$�booklets and other such items to augment their resources to support their mission. However, Section 102 and Section 103 of the proposed DTC prohibit km[`�Y[lanala]k�^gj�Y�kh][aÕ[�[Yl]_gjq�g^�fgf%hjgÕl�organizations engaged in “advancement of any other object of general public utility.” Any such activity carried out by these SPOs in the nature of trade, commerce or business for a fee or any other consideration (irrespective of the use of the income lg�hjgegl]�l`]�[Ymk]�g^�l`]�fgf%hjgÕl�gj_YfarYlagf!�is taxable if the total receipt from such activities is in excess of INR1,000,000. However, there is no need to restrict the business activities of this section of SPOs, since the proposed code in any case restricts coverage of business activities and has only allowed those that are conducted by such SPOs while they are actually undertaking welfare activities.

9f�afn]kle]fl�hdYf�^gj�ÕfYf[af_�KHGk�Zq�Zgjjgoaf_�the principles of professional effectiveness from l`]�N;�gj�H=�af\mklja]k�ak�fgl�Y�[gfÖa[laf_�YhhjgY[`�


to socio-economic development. VP and allied organizations are helping to create the sensitive face of the capitalistic VC movement, and in the process, have opened up new dimensions of growth — for society as well as for capitalism. They ensure that on one hand SPOs are able to effectively compete for their huge requirement of resources in India’s rapidly growing mainstream commercial segment. On the other hand, VPs ensure that SPOs are able to reduce the leakages that occur due to the latter’s j]dYlan]dq�af]^Õ[a]fl�hmjkmal�g^�l`]aj�kg[ag%][gfgea[�developmental goals.

However, in the Indian context, it is important that VP and allied organizations position themselves to achieve the intensity and speed required to meet the varied demand for social products and services offered by SPOs. As the gaps in the VP ecosystem af\a[Yl]$�l`]j]�ak�ka_faÕ[Yfl�k[gh]�^gj�l`]�\a^^]j]fl�elements of the VP ecosystem to pool their efforts kg�l`Yl�l`]q�[Yf�]^^][lan]dq�^mdÕdd�]Y[`�gl`]jkÌ�requirements (as mentioned earlier in this report).

Concluding comments

Based on our study, we make the following recommendations to ensure that VP and allied organizations continue to move forward toward their goal:

�� Establishment of a strategic partnership with the VC and PE industry in the country: Sorenson and Stuart20�`Yn]�klm\a]\�afl]j%Õje�j]dYlagfkàhk�Yegf_�n]flmj]�[YhalYd�Õjek�Yf\�[gf[dm\]�l`Yl�ÉN;�Õjek�oal`�Y�àklgjq�g^�hjgnaf[aYd�afn]kle]fl�patterns and those without central positions in the industry's co-investment network tend to invest locally; those who have established many and \akh]jk]\�j]dYlagfkàhk�oal`�gl`]j�N;�Õjek�afn]kl�across geographic and industrial spaces more frequently.”

The goal-oriented partnership of VP and allied organizations in India with the country’s VC and PE industries is expected to translate into a cohesive endeavor to ensure that new grassroot initiatives continuously grow across the length and the breadth of the country. Such partnerships oadd�fgl�gfdq�Y\\�lg�l`]�Z]f]Õlk�]fYZd]\�Zq�co-investment, but should also be nurtured to develop a managed process of pooling high-

20 Sorenson, Olav and Stuart, Toby E.; (2001); “Syndication Networks and the Spatial Distribution of Venture Capital Afn]kle]flkÊ3�L`]�9e]ja[Yf�BgmjfYd�g^�Kg[agdg_q3�Ngd&�)(.3�H_k&�)-,.%)-00&

quality volunteers comprising senior resource personnel from the VC and PE industries. This will help VP and allied organizations to effectively address their internal capacity constraints and adopt best practices related to portfolio risk management.

�� Need for knowledge-sharing initiatives to be strengthened between VPs and academia: The major component of this partnership should focus on creating the enhanced visibility and approachability of VP and allied models by means of targeted training and educational programs. Such endeavors are expected to be helpful and attract the attention and interest of grassroot organizations as well as young professionals in the domain. Other components of this partnership [gmd\�^g[mk�gf�l`]�fYlmj]�g^�fgf%ÕfYf[aYd�k]jna[]k�and explore the “collaborative” delivery mode for hjgna\af_�fgf%ÕfYf[aYd�k]jna[]k�lg�afn]kl]]�KHGk&

�� Last, but not the least, we suggest that a concerted effort is made to achieve the enhanced d]_alaeY[q�g^�làk�fYk[]fl�Õ]d\�Zq�a\]fla^qaf_�Yf\�partnering with its champions within the policy-making and governance domain. Such initiatives should be directed at creation of laws that identify and incentivize the convergence of the hybrid model advocated by VP and allied organizations.


9[cfgod]\_]e]flkAavishkaar Venture Management Services Vineet Rai and Madhuri Vijaykumar

Acumen Fund Molly Alexander

Ankur Capital Ritu Verma and Rema

Bamboo Finance Eric Berkowitz

CAF India (Social Change Fund) Amita Puri

Caring Friends Nimesh Sumati

Dalberg Global Advisory Gaurav Gupta and Devanshi Mehta

Dasra Deval and Radhi Mehta

Deshpande Foundation Naveen Jha

EdelGive Aditi Thorat

Edmond de Rothschild Foundation Paulline Cavillot

Elevar Equity Sandeep Frias

Ennovent - Social Enterprise Fund Digbijoy Singh

Family Planning Association of India, Dharwad

Financial Management Services Foundation Sanjay Patra

First Light Ventures Mark Hand

Gray Ghost Ventures Arun Gore

IFMR Trust Bindu Ananth

Impact Investment Partners India Health Fund I Varun Sahni and Jay Barrymore

Impact Law Ventures Pankaj Jain

Intellecap Anurag Aggarwal and Pankaj Raina

LGT Venture Philanthropy Inderpreet Chawla

Lok Capital Vishal Mehta

Magic Bus Matthew Spacie

Omidyar Jasjit Mangat

Rashtriya Gramin Vikas Nidhi Amiya Sharma

Salaam Balak Trust Dottie Wagale

S P Jain Insitute of Management Nirja Mattoo

Shell Foundation Anuradha Bhavnani

Somaiya Institute of Management Radha Iyer

SONG Investment Advisors Private Limited Vishal Mehta

Start-up! Manisha Gupta

Tata Insitute of Social Sciences Prof. Satyajit Majumdar

The Nand & Jeet Khemka Foundation Don Mohanlal

Mfalmk�;YhalYd Eric Savage

MfDl\�Af\aY Pooja Warrier

Villgro Innovations Foundation Paul Basil & Reihem Roy

Women Change Makers (India) Devashri Mukherjee


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70. Tsang, Stephen; Welford, Richard and Brown, Ea[`]dd]3� *((1!3�ÉJ]hgjlaf_�gf�;geemfalq�Investment”; Corporate Social Responsibility and =fnajgfe]flYd�EYfY_]e]fl3�Ngd&�).3�Fg&�+3�H_k&�)*+%)+.&�

71. �Lq]Zb]]$�Lqrggf�L&�Yf\�:jmfg$�9dZ]jl�N&3� )10,!3�“A Model of Venture Capitalist Investment 9[lanalqÊ3�EYfY_]e]fl�K[a]f[]3�Ngd&�+(3�Fg&�13�H_k&)(-)%)(..&�

72. Watkins, Andrew; (2010); “'The Venture Capital Perspective on Collaboration with Large Corporations/MNEs in London and the South East: Pursuing Extra-Regional Knowledge and the Shaping of Regional Venture Capital Networks?”; Review of Policy Research; Vol. 27; Fg&,3�H_k&,1)%-(/&�

73. World Economic and Financial Surveys; 2010; Ogjd\�=[gfgea[�Gmldggc�Ç�J][gn]jq$�Jakc�

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74. Vansandt, Craig V.; Sud, Mukesh and Marmé, ;`jaklgh`]j3� *((1!3�É=fYZdaf_�l`]�Gja_afYd�Intent: Catalysts for Social Entrepreneurship”; BgmjfYd�g^�:mkaf]kk�=là[k3�Ngd&�1(3�H_k&�,)1%428.

75. Van Slyke, David and Newman, Harvey; *((.!3�ÉN]flmj]�HàdYfl`jghq�Yf\�Social Entrepreneurship in Community J]\]n]dghe]flÊ3�FgfhjgÕl�EYfY_]e]fl�Yf\�D]Y\]jkàh3�Ngd&�).3�Fg&+3�H_k&�+,-%+.0&�

/.&� Wirgau, Jessica; Farley, Kathryn and Jensen, Courtney; (2010); “Is Business Discourse Colonizing Philanthropy? A Critical Discourse 9fYdqkak�g^� HJG<M;L!�J=<Ê3�NgdmflYk2�International Journal of Voluntary and Non-hjgÕl�Gj_YfarYlagfk3�Ngd&�*)3�Fg&�,3�H_k&�.))%.+(&�

77. �Ogdh]jl$�BmdaYf�Yf\�J]af]j$�L`geYk3� )10,!3�“The Philanthropy Marketplace”; Economic ?]g_jYh`q3�Ngd&�.(3�Fg&�+3�H_k&�)1/%*(1&�

78. Ziliak, Stephen T.; (2004); “Self-Reliance Before the Welfare State: Evidence from the Charity Gj_YfarYlagf�Egn]e]fl�af�l`]�Mfal]\�KlYl]kÊ3�L`]�BgmjfYd�g^�=[gfgea[�@aklgjq3�Ngd&�.,3�Fg&�*3�H_k&�,++%,.)&�


About DASDevelopment Advisory Services (DAS) is a distinctive service line which is focused on providing hands-on assistance to organizations involved in social development.Through our robust methodologies and continuous involvement, we provide, timely knowledge, insight and information to social sector gj_YfarYlagfk�oal`�Y�na]o�lg�]f`Yf[af_�]^Õ[a]f[q$�effectiveness and scalability of their operations.

Our multiplidisciplinary team comprises of development practitioners, management hjg^]kkagfYdk$�kg[aYd�j]k]Yj[`]jk�Yf\�ÕfYf[aYd�professionals enabling us to adopt a lifecycle approach in providing solutions to multilateral and Bilateral organizations, international funding agencies, NGOs and corporate foundations encompassing key domains such as CSR strategy, education, skill development ,water and sanitation, gender and social inclusion, livelihood hjgeglagf$�Ya\�]^Õ[a]f[q$�hmZda[�`]Ydl`�Yf\�natural resource management.


About EY About AVPNErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global gj_YfarYlagf�g^�e]eZ]j�Õjek�g^�=jfkl��Qgmf_�Global Limited, each of which is a separate d]_Yd�]flalq&�=jfkl��Qgmf_�?dgZYd�Daeal]\$�Y�MC�company limited by guarantee, does not provide services to clients.

For more information about our organization, please visit www.ey.com

The Asian Venture Philanthropy Network (AVPN) is building a vibrant and high impact venture h`adYfl`jghq�[geemfalq�Y[jgkk�l`]�9kaY�HY[aÕ[�region. AVPN has more than 110 members from 18 countries and has a Member Directory and listing of Events at www.avpn.asia.

We promote venture philanthropy in the broader philanthropic and social investment communities Yf\�hjgna\]�kh][aÕ[�f]logjcaf_�Yf\�d]Yjfaf_�services to meet the needs of our members.

9NHF�ak�Y�fgf%hjgÕl�gj_YfakYlagf�ZYk]\�af�Singapore with membership across the Asian region. We are supported by grant funding, sponsors and partner organisations.

We are building a cross-sector network bringing lg_]l`]j�gj_YfakYlagfk�Yf\�af\ana\mYdk�^jge�ÕfYf[]$�business and the social sector. Our members include venture philanthropy organisations (practicing members) and associates that bring different networks, expertise and experience.

Associate Members include private equity managers, hjanYl]�ZYfck$�o]Ydl`�eYfY_]jk$�gl`]j�ÕfYf[aYd�k]jna[]k�gj_YfakYlagfk$�hjg^]kkagfYd�k]jna[]�Õjek$�family businesses, corporations through their CSR activities, foundations, universities and government related entities.

We are the hub for news and events focused on venture philanthropy to develop shared learning and best practices. Through our Knowledge Centre we will be developing practitioner oriented resources to help scale the practice of venture philanthropy across Asia.

Please visit www.avpn.asia to learn more and [gflY[l�mk�Yl�af^g8Ynhf&YkaY�a^�qgm�`Yn]�kh][aÕ[�enquiries.

We encourage you to engage with us and support gmj�Õ]d\�Zmad\af_�Y[lanala]k�l`jgm_`�khgfkgjk`ah$�grants, donations, or joining as a member or partner organisation.


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